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Turning Over Another Card Is for Poker, Not Technology Investing

Nate Lentz
August 1, 2018

I was with a co-investor recently and we were discussing our mutual investment. It is a situation where we have been frustrated with progress, both in terms of developing a scalable product and in getting early customer traction (these are certainly correlated). My colleague made the statement that if one thing or another happened, he was willing to put more money into the business in order to “turn over another card.” Poker and venture investing may have some analogies: certain pots are outsized; you need to be in the game in order to win; try to lose small but win big; you need patience; you can’t afford to play every hand even when playing loose.

In my opinion, however, poker (and particularly games where you keep paying to see all the cards like Texas Hold’em) and venture investing are very different – at least for us when we invest in business-oriented software. We invest in leaders and their teams, large potential market opportunities, products that are at least at the minimal viable product stage, and companies with customers and hence early revenue traction. Our successful portfolio companies build value over time through growth and most often exit at a scale which is 20x to 50x the revenue at the time we invested if not more. We can be wrong in our investment decisions and that is part of the venture business, but when we are wrong, we should accept it and fold. A business that is far off track rarely rights itself.

Two key differences between a poker hand and a venture investment.

First: In poker, it’s about beating the others versus an absolute hand and even a mediocre hand can win the pot. In venture, it is generally the case that a mediocre business brings a mediocre return and a great business, sustained over a meaningful period, creates real value.

Second: In poker, the last card turned can make the difference between a winning and losing hand. Thus, the logic of waiting to turn over another card can make sense in many scenarios. In venture, you know pretty early if you aren’t playing with a strong hand and you also know that the longer time goes on, the less likely it is that the management team is going to find the card that changes the outcome.

As the song the Gambler says: “you got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” In B2B venture investing, you just need to fold ‘em earlier and save your money for doubling down on the winning hands. Paying to see another card is often the sucker bet.

Of course one other critical difference between poker and venture investing is the hard working entrepreneurs and employees, who have overcome long odds to build a compelling product, attract initial customers, and pursue a vision exciting enough to attract investors in the first place. In situations where it may not make sense to pay to turn over another card, we certainly don’t fold and simply leave the table. We work closely with management to find a soft landing or a navigate a path to a clean wind down of the business.