There’s a well-known way to win in Vegas, and famously some people have done it systematically. Maybe it works for startups too?
Suppose you’re betting on “red” in a game of Roulette.
There are 41 places a Roulette ball can land — numbers 1 through 40, plus a “double-zero” and sometimes a “zero.” (So it’s a CHAR(2) not an INT(2)). The numbers also alternate red and black — twenty of each plus that special double-zero which is considered neither color. (For the ensuing math we’ll assume a wheels with 00 and without a 0.)
When you gamble on “red,” say, you double your money if you guess right and lose your money if you guess wrong. If it weren’t for that pesky double-zero, this would be perfectly even odds, but there’s 20 ways to win and 21 ways to lose, so the house always gains in the long run.
Still, it’s close enough to even-odds (is that an oxymoron?) that an interesting algorithm presents itself — an algorithm that guarantees you’ll make money.
You start by betting $1 on red. If you win, you take your winnings and leave with an extra $1.
If you lose, next time you bet $2. If you win, you earn $2 and, even though you previously lost $1, you’re still $1 ahead, so you’ve made money.
If you lose, next time bet $4. If you win, you earn $4, you previously lost $3, so you still made $1.
And so on, doubling the amount of money wagered each time. If you play enough times you have to win at some point, in which case you’ll walk away $1 richer. It might be a boring, inefficient way to earn $1, but you always win. Multiply all these numbers by 1000 and it becomes interesting.
But this is even more interesting: You can perform a similar process by betting on a number instead of a color. Betting on number 12 pays 40:1, so if you hit that you win big. Of course there’s just a 1/41 chance you’ll hit, so the process of re-betting has to be done longer — much longer. It could easily require 50 bets.
But when you win, you really win, because the payoff is 40x, not 2x your last bid. So if you won on the $16 bet, you would have lost $15 so far but won $16 x 40 = $640.
So what’s the catch? Nothing really, it’s simple math. It does require one thing: An infinite bankroll. That is, you must always have the money to plunk down; if you run out, then you just lost a bunch of money. You can’t re-bet 50 times, because that requires a bet of $250 = a thousand trillion dollars. Oops…
This reminds me of startup investment theory. You make an angel bet, then double-down with a Series A, then a B, etc.. Hopefully you explode with a 40x return and it’s worth it — but more likely you’ll run out of bankroll before finding that explosion.
It also reminds me of the financial difference between going for the reasonable success versus going for the massive win. When you’re betting on red, there’s lots of ways to win, and you don’t need to try many times before you hit on something good enough to pay the bills and, if you want, slowly grow into something bigger. But if you’re chasing the 40x exit — if it’s go big or go home — you’ll probably go home.
Of course startups are not analogous to roulette, are they? Roulette is a random process; startups are determined by human beings and systematic processes like Lean and AdWords. Roulette has known odds and a binary outcome — payoff or loss — whereas startups generate a spectrum of outcomes and nearly always produce memorable life experiences and relationships.
True, but inspecting the track record of startup-bettors — the VCs — sure makes it look like roulette. On average 9% of companies in a fund have the desired outsized outcomes, and 3/4ths of the funds themselves in the past ten years haven’t produced interesting returns. Assuming VCs are better than chance at picking winners, we must assume the chance for an arbitrary startup is no better than these odds, and in fact possibly closer to betting on “number 12.”
If it the story ended there, this would be a depressing article about how startup successes are so rare that it’s foolhardy to try. But actually the point is exactly the opposite: Using this logic, you can guarantee that you, personally, will succeed.
The trick is to realize that your Roulette game is your entire life, not your current startup, not your current idea. This idea can fail; then you have another idea. That one was good but execution wasn’t there; then you find a co-founder for another concept. That turned into a consulting company, but in consulting you found the intersection of need with budget and spin out another company. Or you go work for another startup who’s latched onto something and get experience and a small exit for yourself which funds the next one.
I think 1/3 of the people at WP Engine right now are in this last category. (There’s room for more — we’re always hiring.)
The path doesn’t matter; what matters is that you’re seeking your own definition of success, and willing to recognize and stop when the current path isn’t right.
The only thing that actually kills you is willful blindness — for example deciding your idea is good without first finding 30 people willing to pay for it, like I repeatedly did until I finally succeeded. And that blindness is what I see most often in startup founders, and what I know will ultimately kill off their companies. They’re wasting time to protect their ego.
Precious time, time to spin the wheel a few more times.
It’s the number of times you spin, not whether you win on the next spin.