Make the call!
(Or optimizing for outcome in a single-shot versus repeated gamed Prisoner’s Dilemma as the founder of a startup)
You’ve probably heard of the Prisoner’s Dilemma, the game theory simulation in which police interrogates two accomplices, and the game theory model maps out when and how each one is individually better off. The scenario for the game has very different outcomes if the game is a one-shot or repeated game. In other words, if the prisoner rats his accomplice out and there are no repercussions, he is better off doing it early. If, instead, it’s a repeat game, ratting your accomplice out in the first go likely means he will rat you out in the second round and therefore you both hedge for what ends up being a less-beneficial outcome for each individual. It’s a high-risk game…
…But nowhere as risky as the voyage entrepreneurs have decided to embark on. They leave behind income stability, some level of normalcy in their lives and all levels of foretelling the future, and they do it all because of their belief in their idea and their desire to take the risk to make it a reality.
So why, given the risk you have already accepted, do some entrepreneurs play the game like it’s a repeat game, where not maximizing for best possible outcomes NOW but rather playing it safe until the next round.
Safe is for your classmate who decided to become a Level 62 at Microsoft. Safe is for the guy who has been at Google for 10 years because the perks are just so good. Safe is for your rockstar CompSci classmate who decided to go build algorithms…for a quant hedge fund.
· Lets say you’ve achieved what only a fraction (12% of all Seed funded companies in the US and 6% in Europe to be exact) achieve by raising a Series A round. Your product is getting traction. You see a path to that magic $5M ARR number if only you had that experienced head of sales …but you won’t hire the sales heads because you’re concerned about burn or cultural fit or you want to wait and see how the current sales team scales up.
There should not be a “wait and see.” It’s a single inning game. Swing for the fucking fences! Hire for the future. If you have the cash, you find the right candidate and you think it could massively accelerate the trajectory, make the call!
· You strongly believe that a specific feature will have a step-change effect on users, engagement and/or monetization. But taking developers away from the backend refactoring will still mean your backend can’t scale… If you’re right and it is a step change you will have a bigger issue, as you will have to hire more backend devs to accelerate the refactor. But that step change will likely make raising the funds (or –gasp- bringing in the revenue) to hire those devs much easier. That is a good problem to have.
Make the call. Nobody ever got fired for choosing IBM. But you’re not choosing IBM, you’re the founder of a startup venture… your next funding round, the success of your company, the delight of your customers and the financial wellbeing of your family, your employees of those that have backed you depend on your call on this one. It’s a single shot game. Which shot has the greatest likelihood of outsized success?
· You’re 25. You’ve nailed the seed round. Product-market fit isn’t quite there yet but you’re getting good buzz and that Techcrunch profile piece made you feel pretty good. Then it comes: The call from the big corporate making a pre-emptive offer. You know that they will likely “Sunrise” the product. You know that the vision you laid out to your team and your backers will only a fraction of the way there. But damn, it’s $2 million in your pocket today…and you live to take another shot at “it”.
With all due respect, if you were getting into the crazy startup game to walk away with $2 million there would have been a lot less painful ways to get there. If that was the end game, your “vision” could have been more easily achieved as an Engineer working on the next feature for Facebook M, or the advanced right click functionality on AdWords, or being the top grossing sales guy in the NorthEast at AOL. All of this might have given you the same outcome and a much lower risk profile. If you were looking for the $2 million as a way to fund the next go at it, then you were playing a repeat game, when all of those that backed you though you wanted to play a single-shot game.
So be true to yourself: What type of game are you playing? Single-shot or repeat game? Be true to your team; be true to your backers. And if you’re in it for the win, then make the f**ing call.
As my favourite little Gaul, Asterix, always says “Alea Jacta Est”… “Let the game be ventured!” Roll the dice…
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Christian Hernandez is the co-founder and Managing Partner of White Star Capital, an early-stage Venture Capital fund backing exceptional entrepreneurs with global ambitions. www.whitestarvc.com
