I’ve never been much of a gambler.

Perhaps it stems from my last 16 years spent as a banker, or my extreme disdain for losing hard earned money. So perhaps it comes as a surprise to hear that I’m a huge fan of casino games, specifically the game of blackjack.

For me, the game represents the perfect combination of probability computation, intuition, and good old-fashioned luck.

Winning in blackjack is fairly straightforward. A player wins when he or she has a combination of cards that bests only what the dealer has.

Predictably as with every casino game, the odds are tilted in favor of the house. Depending on table terms (# of decks, payout of blackjack, etc.) the probability of a positive outcome, actually winning money, for any given player is anywhere between 44% and 48%.   This value presumes that the player is playing “by the book” and understands what action is statistically favorable under all scenarios.

Most people have either read the book “Bringing Down the House”, or have seen “21”, the movie adaptation of the book. As the story goes, a group of students from MIT University travels to Vegas, and utilizes the classic Hi-Lo technique of card counting to gain an advantage over the house. Card counting, if executed properly (much harder said than done), enables a player to improve odds of winning to slightly over 50%, a slight advantage over the house. But unlike what the movie might have led many to believe, it doesn’t guarantee success.

So what do blackjack and venture capital have to do with one another? Actually quite a bit as both traverse a similar mix of skill and luck.

In blackjack, accomplished players acknowledge that external and highly variable factors play a huge role in determining success; from the cards that are ultimately dealt to the behavior of other players at the table. As such, energy is focused on actions that optimize the probability of winning, whether it be memorizing scenario probabilities and/or leveraging advanced techniques like card counting to tilt odds.

Over the past couple of years, capital flowing into venture capital funds is creeping toward historical highs (tossing out the edge case years of 99-00). If history serves as an effective prognosticator, fewer than 10% of these funds will generate returns that Limited Partners will deem to be successful. So why invest? The ones that are successful tend to be really, really successful.

Resembling the game of blackjack, there are multiple external factors that slide the success probability needle in venture either to the right or left. Market cycles, timing of deployment, and basic serendipity all have varying degrees of positive or negative impact. The best managers may be able to mitigate or amplify the effects of these external factors, but often these factors affect the entire industry within a single standard deviation.

I think most, if not all venture capitalists understand the basic core principles of venture capital. They are able to effectively identify market trends, understand the importance of proper portfolio construction, and generally conduct thoughtful business level diligence. This of course, is simply the price of admission, and in no way offers better odds than blackjack players who understand and play by the book, but still face house odds.

Therefore, venture managers must search for methods to improve probability of success – in other words, determine their own venture equivalent of card counting. Similar to the kids from MIT, the objective should be moving the needle on the success probability scale to the right as far as possible. While not a guarantor of success, large sample sizes in skill-based endeavors typically yield predictable results.

Firms like Sequoia, Benchmark, USV, First Round, Accel, and Greylock have established formulas that give them better than house odds.

Mark Suster, Hunter Walk, and Tomasz Tunguz use content marketing and branding to push their probabilities of success to the right.

Emergence Capital, Data Collective, and Ribbit Capital use domain expertise and focus to drive their probabilities of success to the right.

Others like Jason Lemkin from Storm Ventures do both in an effort to make a move on probability scale.

Y-Combinator’s new fund leverages arguably the world best deal funnel to improve its odds.

While only time will determine how successful these investors/funds will be, they’ve undeniably clearly identified methods that they believe will reverse house odds. Others should follow suit and diligently craft their own unique “card counting” methods.

And of course know when to go all-in.

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