Perspectives

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Recently, I was putting together a project proposal for a client when I stumbled across a fairly common problem. Embarking on a new venture, for any startup, is risky, but for tech startups, perhaps, the risk is hedged by relatively little overhead and a short timeline to development. After all, a new website can be built in a year whereas a new farm…you get the point. In any event, the problem I stumbled across was the tendency for tech entrepreneurs in general to be impulsive–aware of the risks yet addicted to the high of winning to the point where they lose their sense in the process. This psychological tipping point is what is known in poker as “tilt”–an emotional state that impairs rational thinking and turns an otherwise good player into a gambler.

I’ve been playing poker a lot more in the last two years, both as a form of entertainment and as a serious academic study. Poker, in its most common variant, Texas Hold’em, is not a game of blind luck: it is a game of skill, intelligence, strategy, risk and reward. If played correctly–as one in ten players do–money can be made consistently in the long run. Like in any other field, only a few master it enough to be a professional. There is no such thing as a perfect player: the best players in the world play each other frequently and trade losses.

In entrepreneurship, a lot of lessons can be derived from poker, in what to do and what not to do. How is poker like entrepreneurship? First of all there is the nature of the hole cards themselves, and how absolute certainty in any poker hand is impossible. Instead, a player must rely on his experience, instinct, and a degree of measured, calculated risk to win money (ROI) on his buy-in (investment). There are different types of poker players, just like there are different types of entrepreneurs. They are loose (risky) and tight (cautious), short stacked (poor) and deep stacked (rich). An investment in a poker game means a chance of failure and loss, but also promises its own much greater rewards.

Many poker players I have encountered at the tables are commodities traders or entrepreneurs–this is not a coincidence. Indeed, the same type of thinking applies to both types of people: people who are risk takers, gamblers, but also thrill seekers and optimistic–maybe even a bit greedy. These traits make successful people, but they can also cause ruin. That’s why professionals and poker players alike recommend that you don’t depend on entrepreneurship or poker as a primary source of income unless it is already a consistent source of income for a year or more. That way, you are not risking ruin if you fail.

midVentures does not endorse gambling (our lawyer told me to put that in). However, I believe that if played correctly, poker is not gambling, but a game of skill. After all, there would be no such thing as a professional poker player if it weren’t possible to master the game! (Meanwhile, there is no such thing as a professional roulette or slots player.) At the same time, most people who play do not do it correctly, and lose money. They play like gamblers and lose like gamblers.

The number one lesson for entrepreneurship from poker is this: Don’t lose your head. The best poker players can be undone by a loss of psychological control. Likewise, don’t let small failures in entrepreneurship drive you off the deep end. Keep your head in the game and don’t be undone by a streak of bad luck. If you are committed to your venture, let your sense and ambition steer you, not your emotions.

As a caveat, if you are interested in taking up poker, do it correctly. Don’t gamble! Take it seriously and don’t spend too much money on learning. Don’t start playing at a casino or a game where a buy-in at a table could be $200 or more. This is money you will inevitably lose at first and you will be more discouraged from learning how to play correctly. Get together a home game where the blinds are $0.05/$0.10 and a buy-in of $5 or $10. This way, you can learn how to play without a great risk of loss. Also, read a poker book or two. Although the best way to learn is by doing, reading and watching poker on TV are two other ways you can get better.

For those who are interested, I am announcing the creation of #ChicagoTechPoker, a weekly poker game for techies only. Only 8 players can play at a time, so if you’re interested, please shoot me an email at brian [at] midventures [dot] com.

Learning how to play poker is a great way to fine-tune an analytical mind, to master a skill set of problem solving and hedging risk, and ultimately a path to success. I hope to see aspiring entrepreneurs at the tables!

A lot of entrepreneurs and innovators talk about how an industry, application, process, or general behavior is “broken”. Broken does not mean inefficient, but rather hints at a structural flaw. A disruptive innovation will generally target a broken industry, looking to replace the broken parts instead of repairing them. These blog posts discuss systems that are seriously broken enough to need public attention.

I just finished a one month gig at a technology investment company, where my role was less about financial analysis than it was about market feasibility. Yet that one month did clue me in to several structural flaws in the business of finance that, if others knew about, had never before come to my attention. As a tech guy I generally assume all trades are like technology, where a programmer can generally search google for a forum thread with the code snippet he wants, he can call his friend at another development shop for help, he can even call Adobe or Microsoft for first-hand consulting from the product source. Tech people don’t lie about preferences or features because they know they’d get called out on lying by the technology blogosphere. In other words, information in the technology sector is generally freely available, you know where to find it, and you are called out when you make stuff up.

Finance, on the other hand, is relatively broken. Simple acts like finding a specific piece of information, such as a company’s competitors and the size of those competitors, is ridiculously hard unless you have the right paid logins to proprietary databases. Unlike technology where developers are held accountable for the precise features of their applications, finance professionals seem to live and die by misinformation and concealment. And even if a firm has good internal information practices, information does not move between firms. Many web companies publish free code or data via APIs, whereas finance firms will often publish nothing because all that knowledge is proprietary. Therefore, 90% of financial research and analysis is redundant in that someone out there in the business waters has likely already performed your research for someone else.

What makes finance broken is not necessarily the allocation of labor and information, but the transaction cost of getting information from point A to point B. We complain that technology job boards like odesk or elance do not have adequate quality control mechanisms for someone seeking work to match to someone seeking a worker. Yet a financial opportunity: research requests, equity needing brokering, a law suit needing allegiances, fraud needing press, financial press needing organization: all of this is disbursed between lunch and dinner conversations of small fragmented financial executives- or distributed via brute force via cold calls- seldom captured in any standard organized form. Finance is broken because the cost of A to find B is not just a matter of organizing A and B but the years of trust, the acquisition of credentials, and approval process and the human interaction behind matching A to B.

A startup at a high enough level acts like a company and a company at a high enough level is making financial decisions, yet there is still a great deal that finance can learn from startups. Most of what makes finance broken is not the technology but the trust networks, and the manner in which financial trust networks have no virtual corollary. If the financial data, the trust network, and the complicated incentives schemes of finance could be brought online like facebook activity, I would have more enjoyed my investmetn experience.

Believe it or not, midVentures was not my first company. In fact midVentures is likely my 4th business I incorporated. That goes all the way back to starting the UChicago bike store and a brief jaunt as a potential Ning.com competitor during senior year of college. However Enproperty did consume about 1.5 years of my life, and is worth reflecting on.

I started Enproperty with my business partner Justin Savage, a UChicago student and Rhode Island native. The business started as Checksense.com which was a simple app that let you pay your rent online. I funded the first version of Checksense using $2000 in credit card debt until Justin came on board. We started selling Checksense to property managers, and realized that collecting rent online was just one of a dozen problems their businesses experienced. That is the root of Enproperty, and the lessons I learned building and selling it.

1. Target an industry that can afford to change. This is strange advice since many business school professors advise students to target industries that technology has not yet advanced, such as how Eric Lefkofsky’s businesses Innerworkings targets the print industry, Echo Logistics targets the freight brokering industry, and both are Chicago success stories. But property management is different because very few of the owners, managers, stakeholders and influencers can afford any type of innovation. It took 8 months of slow-motion sales and marketing to realize the property managers simply cannot afford a solution that might cost them $300 - $800 a month, even if if will save their staff time logging paper payments and depositing them in banks. Property management is an industry with  razor thin profit margins, and on top of that, very few parties interacting with PMs are making great profits. If you are targeting low-margin industries, target the brokers or financiers. It would have been smarter for us to build a solution for the leasing agents or the property investors because they can afford new technology.
2. Don’t just solve problems, solve money-critical problems. I had many advisers telling me to listen to the customers (property managers and tenants) in order to understand their problems and pain points. They gave me a laundry list of problems. It took too long to sort paper checks into bank account specific folders. It was difficult to confirm whether or not a tenant’s “check was in the mail”. Tenants had no confirmation that the managers received the check until it was deposited. Low income tenants could not break up large monthly payments into smaller weekly payments. Property managers did not have up to date contact info on tenants. We solved ALL those problems, but NONE of them were money-critical. In other words, the property managers and tenants thought our solution was nice, but we were not making them a ton of money and we were not directly saving them a ton of money. If my software also helped them fill vacancies, they would have paid me a full months rent for each vacancy filled, because filling vacancies is money-critical.
3. Customers don’t care what you plan on building, only what you give them right now. And they will logically compare whatever you give them right now to whatever competitor ’sounds like that’. Enproperty was the only property management software app in Rhode Island, and perhaps one of three in Chicago. We were web 2.0, young, edgy, innovative. Yet 20 meetings later, I got asked the same questions. How is this different from Yardi, Skyline, MRI, propertyware, etc. And the truth was we ‘planned on’ being different. Our business plan shows why our business model is more effective than those competitors at scale. But customers only care what you give them now, and how it compares to the more established names that they trust more.
4. Your customer is your greatest reseller. I thought this banal textbook concept was true for my parent’s generation, but in business 2.0 customers don’t meet at property management bars to chat about what software they use. Well figuratively, they do. Within any industry, even the competitors talk to each other about which vendors they like or which technology they heard of. In other words, the cost of acquisition of your first customer may be extremely high, but if you can keep him happy he will create 4 more customers. And if you anger him he will cost you 10 customers. Your customer is your greatest reseller and it is honestly more important for you to keep him happy than it is for you to solve his problems. Because the first “guinea pig” customers will likely experience more problems than you solve, so keep an arsenal of tactful apologies.
5. Investors like fast sexy disruptive ventures. Enproperty met with several investors during its lifecycle. The first investors were real estate managers, and they liked the idea of “software that made money off of the payment processing instead of the monthly subscription fee”. We were also the first technology venture they invested in; and therefore we were the Bill Gates of the rhode island real estate community. However the traditional investment community has a different opinion. They want to know why your startup will have an IPO or get acquired in less than 5 years for over $100 million, and why no one else can beat you to the punch. Enproperty was founded on the idea that with $200k in funding we could reach profitability and build off of our cashflows. Though that is nice, venture capitalists are not so patient. Our venture did not move fast enough, we did not have a defensible competitive edge, nothing about Enproperty told VC’s that we would be the one software app out of 50 competitors to own the industry within 5 years.
6. Do something you’re passionate about. This lesson can also get you into trouble, because your passions are usually not a good litmus test for business feasibility. But time and again I am confronted by the fact that I have to spend 100 hours a week tweaking the software, meeting customers, attending trade shows, refining my message, talking to employees or contractors about my startup. Admittedly there is a 50 : 1 ratio of music technology startups to property managemetn technology startups because music is for most of us a greater passion than paying rent online. And I would to this day still commit myself to a non-sexy venture if it helped grow my career as an entrepreneur or my capital for my next startup. And if I had to decide between a fun job and a non-sexy startup I’d choose the startup because entrepreneurship fits my personality. But all things being equal, build something that genuinely interests you- or build something you care nothing about and have a perfect plan to sell out early.