What I learnt about early stage investing while playing Texas Hold’em
There are times in a person’s life when in the midst of something totally unrelated you figure out an answer to things that has been playing in the subconscious for weeks, months or even decades. There are many examples like Newton discovering gravity when an apple fell on his head; Archimedes discovering how to measure the volume of irregular objects when he stepped into this bath tub; or that scene in the movie, ‘A Beautiful Mind’, when a young John Nash is studying at Princeton, and discovers the Nash Equilibrium while sitting with his friends in a bar and they are discussing strategies on how to approach the most beautiful of five girls they were eyeing – Nash in that moment (in the movie) comes up with his Nash Equilibrium theory which has been utilised in strategies from analysing wars to penalty kicks in football.
I had a similar moment (though nowhere as ground breaking as the economic/scientific growth as the gentlemen above) a couple of weeks ago while playing a Texas Hold’em Poker game. During the game I realized the multiple similarities between playing poker and investing in startups which not only helped me in playing (and winning) last night but will also change the way I look at investing in startups!
For the purpose of what I learnt during the game of Texas Hold’em style of poker let’s consider:
1) The hand I am dealt in a particular round as the startup’s business plans evaluated by me, as
a) Whether my cards are good or bad will require validation.
b) I will only back a few of the many hands that I dealt (unless I am playing “Spray and Pray” model of playing poker and/investing).
2) The community cards is the market that my startup is catering to, as
a) Sometimes while I might have great cards dealt to me (let’s say Ace and King) but the market/community cards are 5, 6, 7, Queen and Jack (suited) leaving you with a very uncertain chance of winning because much like my startup’s product, it is too early for its time or the market changed in a direction that my startup didn’t predict.
b) The opposite of that is also possible and it would lead to a ‘monster exit’ as I like to call it.
3) The money you put in is how much I am willing to invest.
a) This is self-explanatory.
4) The pot is the valuation of the company.
a) This too is self-explanatory
5) The rounds of bidding are re-purposed as
a) Pre-flop - Seed
i) I have great cards but the market validation is yet to happen
b) Open-Flop - Angel
i. The validation has happened and there is some traction, but can it scale?
c) Turn - Bridge
i) Yes, it is scaling but it’s not valuable enough for a Series A fund so the investment requires some more pushing.
d) River - Series A
i) This is every angel’s dream i.e. great startup, validation and traction.
ii) This is the time to go all-in!
6) The other players who are bidding are the chances of failure that I am up against i.e. the higher the betting from them is equal to the higher the amount of failure of my startup (because they have a better hand or let’s say my luck is against me). Alternatively, let’s consider them as competing startups that serve my startup’s market too.
7) Small/Big Blind – The investments into angel investment group memberships & your time.
Now that the analogies are set, let’s play…
Round One – Pre-flop/Seed Round
Round Two – Open Flop
Round Three – Turn
Round Four – River & Showdown
This strategy gave me just under a 3x return in a matter of hours and not once did my stack take a major hit. I won 4 out of 5 rounds at the river (the time I lost was because it was a variation round) and got multiple wins before the river because the other players had folded due to the pressure of what they had in hand or of what I may have.
One important thing is that when you are playing variations of the poker that are quite difficult to grasp and you don’t really know what you’re doing – fold! Much like business plans you don’t understand – variations you don’t comprehend are best to get yourself out of.
However, this strategy is a very tight and disciplined strategy. So while I got to play and enjoy a few rounds of poker, I folded weak hands and got across to the open flop round less than 15% of the hands I played.
The important lessons I learned that night about angel investing is to be liquid for opportunities when they present themselves and until then to keep biding your time… working and lurking.
About the author:
Anirudh Damani is a serial entrepreneur and Chief Angel Investor at Mumbai based Artha Venture Partners. His portfolio currently boasts of investments into companies that are redefining entrepreneurship in India. Learn more about him on www.anirudhdamani.com / Follow him on @showmedamani
