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Why VC is Like a Big Poker Game
There is a meme on Twitter about the similarities of VC’s and Product Managers. I commented that A big difference in the VC business is that it takes a lot longer to figure out if you are good, and you also have to deal with a lot more luck
Eric Weisen put forth another analogy – VC’s are like actors. I see his point, but I’ll throw in another analogy. I think the VC business is actually just one big Texas Hold’em Poker game.
It’s a game of skill. I’m convinced that although there is a lot of chance in Venture, in the long run, skill wins out. There is a lot more to this business than just picking great companies. You need to be respected by entrepreneurs and other Investors to get deal flow, you need to have great people judgemet with limited info, you need to add meaningful value to the lives of entrepreneurs, and you need to be smart about how to translate all this to actual returns. Skill matters, and it’s obvious when you meet the really good Investors out there. Same thing with Texas Holdem Poker. It’s a skill game and guys who are good tend to win consistently over time.
Chance has a huge impact. That’s why in any given tournament, you will often see a rookie player make it very deep and sometimes win. Poker is a skill game, but luck matters a lot. Skill wins out eventually, but only OVER TIME. Venture is the same way. A lot of Investors can get a win or two, but the greats have a knack for repeating success over long time periods, generational technology shifts, and changing macro conditions. They won’t win them all though.
Success begets success. In poker, getting a large stack gives a player an advantage over other players because he can use his wealth to “bully” other players. In venture, having a major win provides access to other companies becase entrepreneurs and other VC’s want to work with “the guy who is on the board of xyz company.”. It’s a bit irrational given how luck is such a big factor in isolated wins, but it happens. So guys who get early wins do have an advantage.
I’d argue that these dynamics are the big drivers of the venture industry. I also think that this structure is actually terrible for new entrants. But that will come in a subsequent blog post.
Pleas forgive typos and lack of links. This was written on my iPhone.