Printing Gold — My Guide to Poker Investing

(A Brief Introduction to Poker Staking)

For about 2 years, in addition to playing online poker full-time I invested in online cash game players.  In poker cash (or ring) games, players buy-in with and wager real money on hands, can buy back in at any time, and there is no predetermined end time for the game.  This is in contrast to a poker tournament where you buy-in with actual money but wager tournament chips worth nothing outside the tournament, you cannot buy back in when you are out of chips, and there is a definite end time (usually when only one person is remaining).  The main advantages of cash game staking over tournament staking are faster iterations (takes a much shorter time horizon to realize your edge) much smaller long-term variance (tournament variance increases exponentially with the size of the tournament field), and a larger sample of reliable data available (since game conditions remain relatively constant across levels).

Cash game poker staking, not unlike venture capital, is inherently unprofitable for the majority of participants.  Historically, there has been an abundance of financing chasing far too few profitable opportunities.  There is also the problem of adverse selection as well, where the majority of people who would be profitable to stake bootstrap (fund themselves through profits).  The main potential value add to these players (companies) you can offer is scaling – helping them to grow and move up the learning curve faster.

My “typical” poker staking deal was a 50/50 split of poker profits (although this split varied anywhere from 70/30 to 30/70 depending on player’s track record and length of stake) over 50,000-250,000 hands for an expected deal length of 2-4 months.  Most of my consulting portfolio resided within the US/Canada, but with paid coaching I worked with players in 18 countries total.  I would provide 100% of the necessary capital needed to comfortably play the cash game limits we specified in advance.  In exchange, I would partner with the player and give them the resources available to help them succeed.  This would include ongoing personal consulting via Skype and e-mail at career inflection points as well as making introductions to specialists and peers and providing relevant and timely resources including videos, articles, etc.

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1) Choose Your Investment Thesis

Before you can start investing, you first need to decide what you want to invest in.  I recommend that you stick to only area(s) that you know well from personal experience.  This allows you to evaluate investments more successfully since you know what to look for and what pitfalls to avoid.  From a poker perspective, as I was primarily a no limit hold’em (NLHE) player I could talk to another NLHE player for less than 5 minutes and know if he was skilled or not.  Also, as I have spent many hours evaluating my own playing statistics, I know which metrics are relevant and can get a snapshot of their playing style very quickly.

An additional selling point of only investing in what you know is that it allows you to add value as an investor. If you can gain domain expertise in one area, the best opportunities within that niche will tend to come across your desk first.  As funding becomes a commodity, it becomes increasingly important to differentiate yourself from your competition.  Thus, I always advocate keeping your investment thesis (and personal brand expertise) as narrow as possible to start.  Moving forward, it will always be easier to widen this thesis than it will be to try to shrink it.  Andy Weisman from Union Square Ventures (one of the most respected VC firms) does an outstanding job of outlining USV’s precise investment thesis in a blog post he made today.

Personally, at the beginning I focused solely on investing in Full-Ring (games with 9 players).  This was a significantly smaller market but much more of a blue ocean.  My player network was more established there and my level of perceived expertise was significantly higher within the Full Ring community and I was quickly able to become the leader within that market.  In venture capital terms, I was a top-tier firm – I had the absolute best deal flow and first crack at all of the best opportunities.  When a small fraction of players drive a majority of your portfolio returns (for me the breakdown was 20% of players –> 80% of total return) this is the #1 driver of success.  Once I had fully established myself as the Full Ring market leader, I was able to leverage this success into entering the more competitive Six Max market.  Mark Suster (one of the most respected VC bloggers) talks about investment market selection here and even uses some surprisingly applicable poker analogies… they are quite hard to find!

2) Actively finding deals (strategic networking)

As previously discussed, the most important part of finding the types of deals you are looking for is to be very clear about what you are looking for.  When you talk to others in the industry ask for them to pass along opportunities which fit your criteria.  The majority of these interactions will not “pan out” but a few of them will lead to quality leads down the line, sometimes long after you have forgotten about the interaction. Networking has become sort of a “dirty word” but at the end of the day, investing is a relationship based business.  Make yourself accessible and be strategic about keeping your finger on the pulse of what is going on in the industry.

Other investors may be your competition, but cooperation can be mutually beneficial.  You can discuss best practices and things to be on the lookout for.  Generally, if an investment opportunity has come to you, they have seen it as well.  It is valuable information to know if someone has been “shopping around” or has come to you specifically.  If the other investor has passed and they generally follow the same criteria as you, they probably have a very good reason for doing so – find out if it is due to fit — bad timing, personality clash, conflict of interest, etc (bad investment for them specifically) or due to red flags such as poor references, untrustworthy, unverifiable results, etc (bad investment for anyone).

That being said, always listen carefully to the opinions of other investors but think for yourself.  If a market is universally regarded as “hot” it is probably overcrowded and you should look elsewhere.  You will never find an edge by following the herd.  Search for opportunities that other people tend to disregard or undervalue.  Avoid the sexy and shiny like the plague.  Data is your friend here, people tend to be very lazy when it comes to number crunching.  Social proof is so much easier.  You are looking for un-panned gold.  Do not walk past the mine just because others were unable to find anything there.

Players (entrepreneurs) are your best source of quality investment leads and your best brand ambassadors.  If someone is looking for investment, the first person they will always talk to is someone who received investment before.  If you treat your players well, they will reward you with new business.  For awhile, I considered a referral bonus to encourage referrals but decided against it as it would dilute the quality of leads I would receive.  The highest quality leads are those which come with no strings attached – they simply considered you were the best fit for the job.  I think paid referrals for drumming up business is only a real option (assuming it is not a standard practice) if you feel you are outmatched by your competition.  It is better to concentrate on your product, if you are the best the opportunities will come find you.

On building relationships with players (entrepreneurs) – start early.  If they are already looking for funding, it is probably too late to start building a relationship.  Look for blue oceans.  I tried to invest in people who had not really even considered seeking investment before.  In staking, my investments were relatively high-stakes (later-stage) but I always made an effort to identify up and coming players early on in their careers (at the seed stage).  You can see this trend emerging in venture capital where there is a struggle to “get in on the ground floor”, predictably sending seed-stage valuations through the roof.

3) Passively finding deals (building a pipeline)

Everyone knows that the key to a quality angel/venture capital portfolio is your deal flow.  In order to find a nugget of gold, you need to pan through a lot of gravel.  However, the most important resource an active investor has is his/her time so in VC, a partner may only commit funds to 1 in every 100-400 unsolicited opportunities he receives.  For me, this figure was about 1 in 20.  The majority of investments I did came through warm introductions (the rate here was closer to 1 in 5), but it still very important to have a process in place.  The idea is to maximize the amount of opportunities you have access to, but minimize the amount of time spent on the opportunities you choose not to invest in.

This contradiction means you must to be very quick and efficient at filtering out opportunities and be able to say “not now” gracefully. Brad Feld’s post has some excellent advice on this subject.  Notice that I say “not now” and not “no” – you never should not be closing doors, but at the same time be transparent, do not string them along.  Rob Go summarizes this issue of venture capitalist ambiguity very consisely here.  It is important to give a response with the specific reason(s) why you are currently turning down the opportunity and leaving the door open should they take off or become a better fit in the future.  Several times in my experience, someone whom I had previously passed on came back to me later and was able to demonstrate traction and/or address my concerns and become a profitable long-term investment.  Someone who shows persistence, willingness to adapt, and the ability to respond proactively to feedback is a rare and valuable asset.

My strategy for filtering investments:

a) Anyone can apply, but make the bar to do so very high.

They should have to jump through some hoops to be considered.  For me, an applicant needed to provide quality references and fill out an application which asked the questions dialing in on my criteria for investment (more on this in Part 2).  I would only use this information later in the process, but if an applicant wasn’t willing/able to spend 30 minutes selling themselves and follow simple instructions, this was the end of the process for them.  This had the added benefits of filtering out “shoppers” and increasing the probability of successfully closing the deal once I had decided to invest by increasing their level of commitment to the deal.

b) Automate/outsource the early stages of the process

I had a few metrics which I had found were consistent across all of my successful investments and started to filter out applications which did not fit my basic criteria for consideration.  The idea here was keeping it simple so that I could pay an assistant (analyst) to filter through and decide which applicants were worth my closer look.  First they needed to meet my investment thesis as I was only interested in players seeking staking in mid-high stakes 6 Max or Full Ring NLHE on PokerStars or FullTilt.  Since all past results were public at the time, I had the analyst view track record at similar stakes (earn rate and sample size) and look for growth as a measurable improvement in results over time.

So how to get opportunities to fall into your lap?

Your personal brand and reputation is the most important possession you own – guard it with your life.  Figure out where your target markets “hang out” and get their information.  For poker, that was undoubtedly the 2+2 Poker Forums and most of my attention was focused there. I find Twitter to be an excellent broad resource for building authority as well, but you will want to dive in much deeper if possible (ex. Stack Overflow is the no-brainer if trying to reach programmers). Become active and visible in that community, offer insightful feedback, and build a reputation for being helpful.

- Chris