I wrote this in 2016, now sharing it here.
Poker as a business is radically different from other businesses I have worked in, primarily startup software companies. But what can we take from the poker table to the board room? What skills and strategies honed in casinos can be utilized in building a more traditional business? In my exit interview after finishing third in the WSOP Main Event in 2015, I was asked to compare tournament poker to software startups. I (wittingly) quipped that in both cases the variance was very high, only 10% cash, and only about 1-2% make any real money. But while on face value, they are very different, the skills utilized by elite poker players are largely transferable to the business world.
1. Poker is a Business (at least for successful players). A business requires cash management.
You hear about it all the time. A poker player has a big cash and a year later he is broke. The casual observer asks “how is that possible?” but for poker insiders, it is not surprising. When you look at a player who cashes for $2M, it seems like that is set up for life, but hold on.
First, many players don’t own all of their action. When Antonio Esfandiari won the inaugural One Drop tournament, it looked like a massive $18M cash. But Antonio did not pony up the $1M entry fee on his own. Even for the best and richest poker players, that investment makes little sense. So Antonio (and all the other professional poker players in the tournament) had backers to spread the risk and reduce overall variance. As a result, Antionio’s share was a small percentage of the total cash. The majority was shared by multiple backers.
Second, poker winnings are taxed, massively. If you invest in the stock market and cash out, you are likely to get preferential (capital gains) treatment and a lower tax rate. Moreover, if you incur losses from stock sales, you can roll those losses over into later tax years and deduct the losses from future gains. Not so in poker. Poker, given the element of luck involved, is an inherently highly variable venture. The most profound variance is in live tournament poker. Playing online tournaments, it is possible to play dozens of tournaments every day, and the larger number of events will reduce overall variance (but also increase the overall size of the risk). In cash games, if you lose your stack, you can reload and start over. Moreover, if the game is too tough, you can pick up and find a softer game. In live tournaments, you get one per day, or maybe for five-ten days so it is very easy, and expected, to go through long stretches with no significant cashes. Keep in mind the fact that 90% of participants lose their entry fee and get nothing back. And for those who cash but don’t go deep (usually meaning making the final table or better) the return is often barely more than the entry fee. If you think about it, the average player will cash in one of every ten tournaments that she plays in. If she “min-cashes” that may be 2x the entry fee. So, she nets negative eight entry fees for the ten tournaments. That makes it very understandable, that even for the elite tournament players, who cash twice as often and tend to get deeper, there are still periods where they “run bad” and it is very easy to have a negative year, or many negative years.
If I lose $500,000 in the stock market in 2015 and make $1,000,000 in 2016, my tax is based on a $500,000 gain because the loss is carried forward. That makes sense. If I lose $500,000 in poker in 2015 and win $1,000,000 in 2016, I pay full tax, roughly 54% if you live in California, on the 2016 winnings. So my net for the 2 years is negative, despite the apparently huge cash positive year. Aside from the issue of fairness, and this is clearly not fair, it illustrates that for a poker pro, just to break even, a negative year has to be followed by a positive year that is 2x the previous year’s loss, just to get to zero. I have spoken with one of the most elite tournament poker players in the world, who frequents the “high-roller” ($100,000 buy in) events. He is universally regarded as one of the top ten tournament players in the world, and he has had downswings of $1,000,000+. Hard game to generate a steady predictable income.
So it is no wonder that poker players go broke, even if they stay away from the Sports Book (which is conveniently located next to the poker room at almost every casino in the US). And this is why great players focus on bankroll as much as they focus on ICM and hand ranges. While casual players live entry fee to entry fee (paycheck to paycheck), successful players manage their bankroll and will revert to lower stakes games when they hit a downslide. This requires patience and discipline as it takes time to work your bankroll back up to be able to play in the tournaments (or cash games) with the possibility of very large wins. And part of bankroll management is finding tournaments that are “soft” with a lot of recreational players. So we estimate ROI based on the tournament field and structure. The best ROI for an elite player is a long slow structure with a lot of recreational players. Thus, the WSOP Main Event is probably the highest ROI event of the year for professional players.
How does this translate to software startups, where variance is also high, markets are not always predictable and getting investments (contrary to popular belief) is very challenging? Obviously managing cash is crucial. Going over budget is massively risky. There has to be a game plan for conserving the company’s bankroll and play in games with high ROI. When startups get caught up in the hunt for huge wins, they risk huge downfalls. I remember well the tech bubble and crash in 2000. It was a period where capital seemed unlimited and startups almost universally over-spent expecting IPO’s with huge multiples. I was looking for office space in San Francisco at the time, and I will never forget touring the space that had been leased, gutted and renovated by Quokka before they crashed. It was one of the most beautifully finished and furnished spaces I had ever seen. And most striking, it was virginal new. No one had ever used the space. The company went broke before they had the opportunity to move in. The poker equivalent of tech bubble would be 5000 average players putting up the $1M entry to play the One Drop.
Effective cash management requires preparing for the inevitable unexpected challenges, lost customers, missed product deadlines, slow collection on invoices, new competition… It requires finding ways to generate high return on capital. Is it more valuable to hire another engineer or a new sales rep? Where do we spend our marketing dollars? What has the highest return? Elite poker players understand these questions very well as they run their poker business in an environment where making an error can be fatal for the business.
2. Information is hugely valuable in poker as it is in business.
For casual poker players, it is all about their cards. If they have a good hand, they bet, if not, they fold. Occasionally, they will bluff if they “miss” and think that is the only way to win the hand. These players will usually “overplay” top pair or over-pairs and pretty much work in an information vacuum. They don’t understand how to evaluate their opponent’s likely holdings and play accordingly. So they win small pots when they are good and lose large pots when they are up against bigger hands. For elite players, it is all about information. We hear about “live tells”, players doing something physically that indicates strength or weakness. And while all good live players look for tells, they are rarely found. I probably find a reliable tell on a player about once every tournament. When that happens it is massively valuable, but, usually, information comes in more subtle forms.
I am constantly surprised by players, including excellent professional players, who sit at the poker table with headphones on and an iPad in front of them, playing video games or other poker games, or watching a movie. They miss so much information and that information is so valuable. Every tournament, I see a player with headphones make a betting mistake because they didn’t hear what the better said when he tossed in a chip. If the blinds are 100-200 and the player tosses in a 1000 chip and says nothing, it is a call (one chip rule), but if he says “raise” and tosses in the chip, it is a raise to 1000. Or he may say “550”, in which case the raise is to 550, not 1000. Or he may say “all-in” and toss in the 1000 chip when the bet is actually his whole stack which may be 10,000 or more. When the player with headphones does not heat the verbal announcement, he often makes a mistake, assuming something different than what the actual bet was. The worst case I know of involved a player who was opening a round of betting and while tossing in a 500 chip, inadvertently said “five thousand”. The next player, with headphones on, said “call” and tossed in 500. The floor was called and, since in poker verbal announcements are binding, the original bet was required to be 5000, despite the intent of 500 and the caller was committed to calling 5000 out of his 10,000 stack. More frequently, the player with headphones will just slow the game down, taking off his headphones and asking what the bet was. But I also hear people say amazing things at the table. Explaining what their thinking was on a particular hand or analyzing how someone else played a hand. Poker players want people to respect their game and they will talk strategies to explain their play or others’ play. This is, of course, hugely valuable information that is freely available whether you are in the hand or not.
Watch Fedor Holz at a poker tournament. Fedor is one of the most respected players in the game, a mathematical genius and an amazing reader of hands. After great success online, he has over $7M in career live earnings. Amazingly all of his live cashes are in the last year. Fedor is 22. Whether he is in a hand or not, Fedor is intently observing the action. He is always looking, not just for physical tells, but for information to be gained by others’ actions. And the action in poker is betting. Every time a bet is made, observant players are defining a range of hands. If he opens in early position, it means one thing. If he opens on the button, something different. When an open by the “under the gun” (first to act) player is called by the next player, that generally indicates something pretty specific about the calling hand. What hands would he call with rather than fold or re-raise in that position? The more you observe players, the more reliable the information gained becomes. So on every “street” (in hold’em there are 4 rounds of betting called streets – pre-flop, flop, turn, river) the observant player is continually refining the range of holdings that are likely for each player. Occasionally, a good player can, with high accuracy, predict the exact two cards that his opponent has (“you have AK with the A of diamonds), but more often, especially versus strong players who look to “balance their range”, a good hand reader can estimate the value hands and bluff hands in his opponent’s range. And when there are a lot more bluffs in the range than value hands, the call is easy. When there are few bluffs in the players range, the question is how many of his value hands can I beat? But to gather this information efficiently, the player must be observant. This requires work and discipline, especially when he is not in the hand. That is usually when the best information is made available.
Likewise, in business. There innumerable sources of information about markets, competition, about customers that are ignored by entrepreneurs because they lack discipline or don’t pay attention when they are not “in the hand”. Or they have their own form of headphones, too narrowly focused on short term tactics so they ignore the myriad of information that is available to them. Businesses also miss out on large amounts of information that their customers can, and want to, provide. How often does the sales team walk into a room or start a web conference by going through their product deck or their demo without bothering to find out what the customer needs? Are they too busy talking (focused on their own hand) to notice the physical tells being offered by their customers (enthusiasm, interest, boredom)?
3. You must take (calculated) risks to win.
In tournament poker, you must take risks. You simply cannot succeed waiting for AA or only risking chips with the nuts. You need to evaluate and re-valuate your market (the table) and make moves that include bluffs and thin value bets. But you cannot do this in a vacuum. You must have a good understanding of your market coming in and understand what risks are likely to pay off. In bigger, slower tournaments, you can be a little more patient waiting for “spots” but even in the Main Event of the WSOP, with 30,000 starting chips (50,000 in 2016) and a slow structure with two hour levels, if you only play premium hands, your stack will dwindle away and you end up getting knocked out going all in with QQ vs AA or with top pair, top kicker vs a set. In faster tournaments like the local daily tournaments with 20 minute levels, you must be even less risk adverse while taking advantage of the typical player who never folds top pair and hates to fold KT or any A to a pre-flop raise.
While some software companies succeed by taking proven ideas and executing better, the big winners take big risks in previously unknown or unproven markets. I had my real start in software at Informix (then Relational Database Systems, RDS) in 1983. There were a few other companies that had started selling commercial relational database systems (Ingres, Oracle, Unify) but when we presented to customers in 1983-84, the first slide in the deck was “What is a relational database system?” That slide came out a few years later, but we were betting on a new technology. In addition, Informix made two more bets: that microcomputers would succeed and that UNIX would be the operating system for those machines. Oracle and Ingres ran on bigger, more commercially successful VAX machines running VMS. This was pre-IBM PC and the microcomputer landscape was confused with dozens of manufacturers, none of whom were (or are) well known. And UNIX was fairly known in academia (developed largely at UC Berkeley) but unproven in the corporate world. So, we took not one, but three big bets. If any of them had failed, Informix would have also been a failure. But all three bets proved good and Informix went public in 1986 and eventually commanded a multi-billion-dollar market cap.
4. Poker is a zero-sum game. Business is not.
Negotiation in poker is betting. You place a bet which is an offer to do business with your opponent. This is the price of proceeding. Typically, the longer you do business, the deeper in the hand you get, the more costly it is to proceed. Not very different from business negotiations. What is different is that, with a few exceptions, poker is a zero sum game. What is good for me is inherently bad for you. I win, you lose. This is an attitude that some bring to business negotiations as well. This is a huge mistake. The best deals are not perfect for any of the involved parties. They are a compromise that is not ideal for anyone, but beneficial for all. When entrepreneurs are more focused on winning, on maximizing the value of their hand, extracting as much as possible, the outcome is either losing the deal or reducing the likelihood of a long term customer/partner. Game theory suggests that when a group is involved in a venture, the best outcome is not achieved when each individual actor works to maximize their own gain, but rather when the maximum gain for the group is sought. The poker equivalent is a satellite tournament. In typical tournaments, the payout increases as you move up. So the pay for first place may be 50% or even 100% more than second place. Finishing tenth may be only a small fraction of first. In a satellite, there are typically a set number of equally valued awards regardless of order of finish. For example, you may enter a satellite to win a seat at the WSOP Main Event, valued at $10,000. If there are 100 entries, and $1000 of each entry goes to the prize pool, there will be 10 seats awarded. So there is no difference between finishing first and finishing tenth. However, there is a huge difference between 10th and 11th as 10thgets a $10,000 seat and 11th gets nothing. So, when a satellite approaches the money, it is beneficial for all the participants, other than the short stacks, to work together to ensure that the short stacks are knocked out so everyone else can make the money. While collusion is absolutely prohibited, there is a subtle teaming that takes place to try to eliminate players and help ensure that everyone else benefits. For example, with 11 players left and 10 to be paid, if a short stack goes all in and is called by three other players, those three will typically check down all the way to the river, rather than bet a strong hand, so that all three are in to the end and if any of the three beat the short stack, the desired outcome, getting into the money, is achieved. Betting may maximize individual gain by making it more likely that the bettor will win the pot, but it works against the common goal of finishing the tournament and getting awarded a seat in the Main Event.
5. The Key to Success
When I made the 2015 WSOP Main Event November Nine at age 61 a big deal was made about age as the Final Table tends to be dominated by young male players. 2015 was especially significant because, while I was older than any previous final table player in the November Nine format, I was joined at this final table by 73-year-old Pierre Neuville, making age a highlight for Final Table conversation. And while it is admittedly tougher to concentrate for 13 hours a day for seven days of poker at 60 than it was at 22, I am convinced that the skills, and especially the dedication, that players bring to the table are the key to success. Do younger players enjoy more success because they can concentrate longer, get tired less or because they are just more prepared? When I started at Informix in my 20’s, I was unencumbered by life. I was single, didn’t own a home, had no one and nothing to distract me from my job at Informix. And the company was mostly like me. Young, single, dedicated to success. So we worked long hours and socialized with the people we worked with. Outside the office, we talked about work. We were always thinking about how we could do better, have more success. This was a work environment that I would never come close to duplicating. Part of it was timing, but a large part of it was changes in life. Families, time doing homework, going to the kids’ games, work around the house, expanding social relationships – all distractions from absolute dedication to the job. We started to talk negatively about the workaholics and positively about the need for work/life balance.
The young, elite poker players do not try to balance their lives. They are almost universally single. Some, not only have no mortgage, but no home. They just travel the poker circuit. Their lives are very unbalanced. When they are not playing live, they are playing online, and when they are not playing, they are preparing. The elite players have great skills. They know the math of the game, but they are constantly analyzing play to improve their skills and to prepare for as many situations as possible in a game where the number of possible situations is close to infinite. In poker, the game is dominated by the ones who work the hardest, ignore distractions and are tunnel focused on their job. In business, success also goes to those who are most dedicated to the job at hand. It has to be a conscious decision to be unbalanced, to dedicate your energy almost exclusively in one direction, and unfortunately, sacrificing anything else that constrains your ability to be the most prepared person at the table, be it a poker table or a conference table. Anyone who prepared for every business meeting that had $1M+ on the line, the way I prepared for the final table, would be a great success in business. I am convinced that the Main Event is dominated by young players not because they have more stamina than older players, but just because they are in a time of their lives when they can work harder, avoid distractions and be more prepared when they sit down to play.