Archive for November, 2019

You Gotta Know When to Hold Em’

Posted on November 26, 2019. Filed under: Uncategorized |

I used to play a lot of poker when I was younger. If you read about underground card rooms in New York City in the early 2000’s, or have seen the film Rounders, it wasn’t quite like that…but it wasn’t unlike that. At the time, poker wasn’t televised yet, and at least in the places I played, people weren’t doing the math the same way they are today. As a result, it was easier to win. My approach at the time was a few fold:

1) I’d commit to very long blocks of time when I’d sit down to play (which is actually quire exhausting). When you know that you are going to grind it out for 6 or 8 hours, it makes it much easier to exercise patience and wait for the right hands. I’d play very “tight,“ which means I’d fold down all but the best hands, and I trusted in the discipline of my approach irregardless of what else was happening at the table or to my stack of chips.

2) I spent more time watching the people at the table than I did calculating the pot odds of a given hand. 8 hours is a lot of surface area to observe people’s behavior. Generally, I was looking for people who were “on tilt,” which is a phrase to describe someone who was prone to making emotional or irrational decisions as a result of a previous hand or event at the table. You could put a person on tilt by winning a big hand, but you could also achieve the same end simply by talking to them at the table. I talked a lot…nowadays, you see the people on TV totally stoic, sunglasses, hat pulled down, trying not to reveal anything with body language. That wasn’t me. I’d talk and talk and talk and try to shape the energy at the table.

This week, and generally speaking over the past few months of Pace Capital being in business, I find myself exercising muscles that I definitely built at the poker table. As a general statement, the early stage venture markets are VERY fully priced at the moment. Many have commented that we are at the end of a cycle…it’s not my job to predict if or when the tides shift, but it is my job to stay true to our strategy through all market environments, exercise discipline, and not get caught up in a specific moment in time from a capital markets perspective. We’ve been in business for almost 5 months and I have folded down every hand I’ve seen. I’ve been at or near conviction on two companies so far. The first raised money at ~2x the price I felt comfortable investing at. While I wasn’t happy with the outcome of not getting to go on that journey, I am happy with the process we ran and the discipline we exercised to stay rational in irrational markets. The second company I absolutely loved and price was not the issue. I spent a ton of time and energy and so hoped that it would be my first investment at Pace. Despite loving the founders, loving the market and thesis, and seeing a path to a positive outcome, in diligence it became clear that the risk I would be buying at the Series A was actually closer to Seed risk. Things are all moving the right direction and the vision is spot on, but I recognized that the risk/reward didn’t fit Pace’s investment thesis as a Series A firm. We strive to eschew outcome oriented thinking at Pace in the name of finding either alignment or misalignment on any potential partnership, but I am human and I am disappointed with the discovery of misalignment.

A flaw in my approach to poker, was that on a day good cards weren’t coming, if you keep folding down hands for 8 hours, eventually the blinds (which is the ante you must put in to sit at the table) will eventually kill you. I’m not sure there is an exact corollary in venture investing, but the closest thing might actually be the management fees you are taking while not deploying capital. Drawing fees adversely impacts net-IRR, which is a core metric your LPs use to measure your performance.

The second, and perhaps more interesting poker analog, is that venture investors are not immune to emotional decision making. As a founder raising money, you don’t walk into a venture capital firm’s office thinking about what the GP you’re meeting experienced yesterday or last week. Your instinct is to believe that your company and opportunity will be evaluated in a perfectly logical vacuum, but in practice that’s not the case. That GP might be on “tilt,” which may either bode positively or negatively for your pitch, but a no or a yes may result from events over which you have zero control or knowledge. As I wind down a pretty intense sprint on the second company I mentioned, I am pushing myself to be aware of how that disappointment influences the next pitch I see. Writing this post is perhaps even an exercise in recentering. There are countless startups calling on machines to make more rational decisions in markets were human emotion costs margin…I don’t think venture investing is well suited for that approach, but there is something to modulating the peaks and valleys of a deal driven practice when trying to make consistent great decisions. Who would have thought that playing cards would be such good preparation for my ultimate vocation??