Yesterday, Alec Torelli and I discussed the similarities and differences between Poker and early-stage Tech investing. Some interesting learnings.
Quick recap
The discussion between Martin and Alec revolved around the similarities and differences between risk assessment in poker and investments.
Summary
Crypto, Poker, and Investment Decisions
Martin, a seasoned entrepreneur, shared their extensive investment experience in crypto and venture capital. They also likened the investment process to a game of poker, noting the similarities in decision-making and risk-reward analysis. Alec, an avid poker player, agreed and discussed the parallels between the two. Alec also shared their own investment journey and how they applies their poker experience to venture capital. Both Martin and Alec highlighted the importance of objective decision-making in investment, separating emotion from the process.
Betting and Investing: Risk-Reward Analysis
Alec and Martin discussed the similarities between betting and investing, focusing on the importance of risk-reward evaluation. Alec explained that by betting on odds of 10 to 1, one only needed to be right one out of 10 times to break even, doubling the investment if one wins twice. They emphasized that profitable investors often lose most of the time, but the substantial wins cover the losses and then some. Martin shared their own experience, where they made a bet with 40% odds of winning, earning 10 times their money, demonstrating the potential for substantial profits even with a losing bet. They concluded that taking a lower probability bet with high potential returns was a key strategy in both gambling and investing.
Angel Investing Strategies and Probabilities
Martin and Alec discussed the strategies and probabilities involved in angel investing. Martin shared their personal experience, noting that they had identified six unicorns out of 72-74 investments in the last four years, which is significantly higher than the random probability. They also mentioned that they are targeting a potential 2.4 unicorns per 30 checks in their new fund. Alec emphasized the importance of maintaining a consistent bet size across a similar selection criteria network to mitigate against biases. Martin concluded by emphasizing the importance of investing a meaningful size, citing an example of a friend who made a $250,000 investment that turned into over a billion dollars.
Investing and Poker Volatility
Alec and Martin discussed the emotional volatility associated with investing and poker. Alec shared their perspective on the importance of standardizing check sizes in poker and recommended maintaining a portfolio of 3 buy-ins up or down. Martin agreed, suggesting that investments should not exceed 5% of a person’s total net worth due to the high volatility. Alec also touched on bankroll management in venture and highlighted the need to either have more capital or write fewer checks. They further suggested that a small investment in a high-risk venture could yield outsized returns.
Poker Hand Variance and Emotional Regulation
Alec and Martin discussed the concept of variance in poker, using a poker hand as an example. They highlighted the importance of emotional regulation and decision-making in the game, with Alec emphasizing the transferable skills gained from poker, such as managing money and emotions. The conversation also touched upon handling audience questions during their meetings, with Alec suggesting leaving questions in the chat for rapid response.
Probability, Decision-Making, and Investor Value
Alec and Martin discussed the concept of probability and its application in decision-making, particularly in investments. Alec emphasized the importance of thinking in terms of probability, not black and white, to better assess outcomes and risks. Martin pointed out that in venture capital, investors can add value and influence the outcome of the project by providing support and advice. They also discussed the role of emotional intelligence and active listening in problem-solving and decision-making. Ethan chimed in, agreeing that active investors can significantly influence the probability of success. Martin concluded by highlighting their coach mentality as an investor, rather than assuming they knows better than the CEO.
Venture Capital Underperformance and Blockchain Solutions
Martin and Alec discussed the underperformance of many venture capital funds, with Martin arguing that these funds underperform because many venture capitalists lack originality and simply follow the crowd. Martin emphasized the importance of non-consensus thinking and being right to achieve alpha, a concept that Alec agreed with based on their experiences raising deals and syndicating money. Alec also highlighted the issue of illiquidity in venture capital, proposing that blockchain technology could potentially tokenize assets and create a more efficient market.
Earnings Limitations and Portfolio Value Enhancement
Alec and Martin discussed the limitations of using earnings as a measurement for success, noting that it can create misleading impressions. They suggested that there’s room for improvement in terms of transparency in both their industries. Martin highlighted the importance of experience and pattern recognition in investing, and shared their personal strength in securing follow-on financing for startups. They challenged other venture capitalists to identify their unique strengths to enhance their portfolio’s value.
Investing and Poker Strategies Compared
Martin and Alec compared the strategies of investing and poker, highlighting that in both, it’s crucial to understand the game and separate the merit of the decision from the outcome. They emphasized that luck can often influence outcomes, leading to incorrect feedback and potentially poor decision-making in the future. Alec stressed the importance of being ruthlessly self-critical, monitoring one’s own process, and seeking feedback from others. Martin noted that they uses a similar approach in their role as an angel investor, focusing on the process rather than the outcome.
Investing Process and Non-Consensus Moments
Alec and Martin discussed the importance of ruthless process in investing, emphasizing the need to focus on the process rather than the outcome. Alec shared their approach of studying tapes, consulting with respected peers, and running hands in simulations to improve their game. They also highlighted the significance of finding non-consensus ideas in investing and the challenge of identifying these moments. Martin shared their strategy of investing in non-mainstream, high-growth areas such as security software for storage units. They both concluded that the most rewarding aspect of investing is finding non-consensus moments and investing in them before the herd.
Follow Up
Incisive Ventures
- Follow Martin Tobias on Twitter @martingtobias.
- Join the Incisive Ventures Founder Newsletter, The Founder Journey.
- Join the Incisive Ventures Investor Newsletter, The Investor Journey.
Alec Torelli
- Follow Alec Torelli on Twitter @AlecTorelli
- Subscribe to his wealth and wellness Substack.
- Go to his Poker Coach site, Conscious Poker
