I like poker, but I’m better at chess.
Poker can be a lot of fun if you have a witty enough group of friends and a generous snack budget. There’s nothing worse than playing poker with a bunch of serious gamblers who think conversation and choice of hot wing spiciness are potential tells.
I like chess because nothing is hidden. I don’t like leaving things to chance, and I’m often foolish enough to believe I can figure out how to win if I have all the information.
In chess, there are no missing pieces. There isn’t a sneaky queen that your opponent can place on the board when you least expect it. Everything is in the open. The strategy and tactics are entirely determined by what is sitting in front of you in plain sight.
If I try to play poker the way I play chess, I’m going to lose. I can’t see all the cards. Information is hidden from me, and it’s information I need to make the right decisions.
If you can’t stand the uncertainty of poker, don’t do a startup. Don’t do an innovation project.
Innovation is like poker.
The Rules of Startup Poker
This is not an ordinary game of poker. (So don’t worry if you’re not a poker player, this will still make sense.) I will stretch the analogy of Texas Hold ‘Em as far as I can in this special variation of Startup Poker.
Each player needs to pay the ante to play. This is a cheap game, so we’ll keep the ante at $1. Those are the costs of running an innovation project.
Each player gets dealt two cards that they can keep hidden. These cards represent the organization’s unique capabilities and business model — what they already have when they start.
As a normal Texas Hold ‘Em game progresses, the dealer will turn over additional cards in the middle of the table, which each player can use as part of their hand. First there are the three cards called “the Flop,” which are turned over at the same time. Then a fourth card is turned, which is called “Fourth Street” or “The Turn.” The last card is “the River.” Players can place bets before each of these rounds, trying to raise the stakes and force other players to fold.
In Startup Poker, all these shared cards represent the Market. The first three cards are “the Early Adopters.” The fourth card is “the Early Majority” and the last is “the Late Majority.” As the game goes on, the Market matures and players discover if they hold the winning hand.
The winner of the game is the person who has the best fit between the cards in their hand (which represents their business model) and the cards on the table (the Market). We can think of this as Product / Market fit or Business Model / Market fit.
The basic setup is the same, but remember, we are not playing regular Texas Hold ‘Em. Our rules are a bit different.
Information Costs Money
In Startup Poker, players have to ante another $1 every round to stay in. This is the cost of product development. (For our purposes, we are eliminating the standard Hold’em practice of “blinds,” which is a form of uneven antes.).
Additionally, instead of every round beginning by flipping over Market cards, players can get a preview by paying an additional $1 for each card. (In real poker, everyone sees the flipped card, but in our version you’re paying for a sneak peek.)
This is the equivalent of funding an innovation team to gather Market information. This investment isn’t really just money, it’s blood, sweat, and tears. But since people * time = money, we’ll just use our poker chips to represent this investment. The team is really going out into the real world, talking to customers, putting up a landing page, or running some other form of experiment or research to gather information.
At that point, they have the option to kill the idea (fold) or persevere before a round of betting.
Should we go straight ahead and bet on our hand? Or should we buy a peek at the Market first?
Bet It All in Waterfall
We could just close our eyes and bet it all on our pair of jacks. This is the equivalent of waterfall development, where we place our bets and literally let the cards fall where they may.
We believe our cards are the correct ones for the Market, despite having not seen a single card from that Market. So we are placing a lot of faith in our business model and capabilities — our pair of jacks — and to be fair, that is a formidable hand.
But we’ve invested for the long hall, so we push it all in and check the snack bar while the hand plays out. But the Market isn’t kind. Our opponent starts with a 2 and a 4, but winds up closing a 2-6 straight with the 3, 5 and 6 from the Market. We lose to a weaker starting hand that ended up being better for that Market. We end up sitting in the corner binging on Pringles and lukewarm beer for the rest of the night while everyone else keeps playing, but that’s a risk of Waterfall.
Information Has Value
So instead of going all-in based on our business model and capabilities, should we buy that peek at the Market if we’re holding a pair of jacks?
The answer here is yes. Obviously so.
If everyone is sneaking a peek at the next card except you, you are at a huge disadvantage. Now they are playing chess because they can see more of the board. Meanwhile, you think you are still playing poker.
True, they still can’t see their opponents’ hole cards, so they don’t have all the information, but they have more than you.
So should you pay for the peek no matter what you are holding in your hand? Well, that depends on the cost.
Don’t Play Every Hand
If you start the game with a 2 of spades and a 9 of hearts, you have a bad hand. It’s not worth getting Market information because you are woefully unprepared for any Market. You might get lucky and find three twos on the board, but that’s a longshot. The odds are that someone else has a better hand. Just fold and play the next hand.
For large organizations, this is the equivalent of having an idea that is fundamentally mismatched with the company.
“Let’s make vegan hamburgers,” says the mining company.
This makes no sense. It is the 2/9 offsuit of business ideas. Let’s skip this idea and work on something with a little more promise.
In the real world, startups aren’t stuck with the cards that they are dealt. If something isn’t working with their business model, they can pivot.
You can also alter your product in Startup Poker, because after you peek at the cards on the board, we let you trade the cards in your hand — for a price. Each round, each player has the opportunity to trade in one card at a cost of $1. It’s an option to change your product / business model after you’ve gotten a taste of the market.
So let’s say you start with a pair of twos — one heart and one spade. You pay $3 to peek at three cards. They are the three, four, and five of hearts.
You might want to trade in your two of spades and get a new card from the deck, giving yourself a shot at a flush, a straight, or a straight flush.
You are exercising an option to find a better fit with the Market. It’s only the information that you’ve gained by buying a peek at the Market that makes this pivot worthwhile.
Let’s face it, arrogance never helps in chess or in poker. Everytime I get cocky in chess, I lose.
Chess rankings are highly visible when playing. So when I relax for my lunchtime game and see that I’m playing someone with a rating 200 points below me, I know I’m going to win. Which is of course exactly when I’m going to lose.
I’m so confident in winning that I start checking my Slack messages while playing. Then I draft an email. Then I make some tea. I get distracted, forget my plan, and generally make a stupid mistake.
“Bad luck!” But there is no luck in chess — this is the folly of arrogance.
If we really wanted to make Startup Poker realistic, every player would be forced to drink 5 shots of bourbon before playing, then when they look at the two cards in their hand they’ll be convinced they have three of a kind. Every entrepreneur thinks they are the second coming of Steve Jobs.
Confidence is great. Good entrepreneurs don’t go into a market without some level of confidence. But arrogance allows your confidence to overrule your judgement.
The Size of the Pot
There’s another oddity to Startup Poker in that no one knows exactly how big the pot is. It is somewhat determined by the antes that people are paying in and the bets being made, but mostly it’s determined by the Market.
Of course, people can bet up the pot and force players to invest more to keep up. It’s the same as startups competing against each other. When one buys advertising, the others better match it or have a better strategy.
To calculate the value of the Market, we add up the value of the cards to determine the size of the pot (numbered cards are worth their face value, royal cards are worth $10, and aces are worth $15). So this makes buying Market information even more important.
Don’t waste your money and time playing for a small pot.
Lastly, look at who is competing. It can be very compelling to play in a game with fewer people. Remember, the size of the prize is mostly determined by the Market, not the amount of competition. Unfortunately, in Startup Poker, players can join the game at any time.
When the dealer starts turning over Market cards, players who have not anteed up to that point can opt in. Of course at first they are at a disadvantage. They have missed at least one opportunity to get advanced information, and they’ve lost at least one opportunity to pivot. But they can still get into the Market — a Market that you’ve already invested in.
So if the first two cards the Market shows are a King and Jack, that’s $20 already in the pot. That might attract some latecomers to the game, and the competition might increase quickly.
Players who find themselves alone in a game at the early stages should still take advantage of the opportunity to get more information early, and to pivot if necessary. Even if you are the only one in the game, any latecomer can show up, drop some cash, and find a better Product / Market fit. Your business plan is suddenly obsolete because you failed to take the first mover advantage.
Lastly, in Startup Poker, there is more than one hand. Remember that you can keep playing.
If you’re an entrepreneur, losing a hand is not the end. Take some time, save up some chips, and try again. Most entrepreneurs don’t get it right the first time. The trick is to make the most of each hand by buying information before the big lumbering organizations get into the market.
If you’re a big lumbering organization, don’t worry! You have as many chances as you have budget. Just don’t blow all your money on one hand. You need to have an innovation strategy and portfolio of investments.
Either way, there’s always next week’s game!
- Startups are like poker, not chess.
- Buy information if you have a halfway decent set of cards.
- Be humble.
- Beware of latecomers who could wreck your game.
- You can’t win every hand, but as long as you have resources you can keep playing.
Download Rules of Startup Poker