Wait?! Is This Vegas or Venture Capital?

As I write this, I’m on a flight home from Las Vegas. If you know me well, you know I love coming here, which horrifies some, amuses others, and just elicits a wistful longing in the hearts of my closest comrades in arms. I didn’t really fully appreciate my love for Vegas until I started in the world of venture capital about 16 years ago. It was always fun, but with that experience in the background, it became particularly ironic, which is the best part of Las Vegas aside from the free drinks at the tables and the ability to wear age-inappropriate clothes in public.

Here’s why: when I’m in Vegas, my most favorite thing to do is to play craps. I could stand there all day, cash flow-permitting. And while I was there this time, standing at my usual spot at the head of the table where I can see the entire retinue of players in their amusingly creative garb, it came to me exactly how similar craps is to investing in the venture capital world. Yes, they both have an aspect of gambling, which is the obvious, but a table of 16 people rolling to hit the point has so many similarities to an investment experience that I am going to get a whole blog post out of this. Ready:

1. The language is arcane and the rules obscure. In craps there are terms of art like “on the hop” and “C&E” and “horn high ace deuce and “Big Red.”  If you don’t know what the terms mean, they sound like a foreign language. When you get a table of people who know the language and who are screaming it out fast and furiously while throwing money around, those who haven’t played the game are scared away, worried that it is some sort of secret language that takes years to learn. Of course, if 16 drunken idiots and the table men can speak it, anyone can, but it is intimidating to those standing around as observers. This is exactly like venture capital, where most people who aren’t in the business don’t even know what “venture capital” means, much less the language that goes with it. When you tell someone you are in venture capital, unless they have lived their whole life in Palo Alto, CA, they say things like, “ok, but what exactly do you actually DO?” When you start throwing around money while spouting words like “liquidation preference” and “cram down round” and “mullet money” and “participation feature,” the uninitiated give you that same blank stare. Of course anyone can learn what those words mean, but they are intimidating, especially when spoken with the bravado of the people setting the table point or the deal terms.
2. It’s largely a man’s game. If you look at the average craps table on a busy Saturday night, 95% of the people standing around it are men. There is a lot of cleavage in Vegas, but not usually at the craps tables. This is pretty much what you are also going to see at any venture capital partnership or the typical board meeting of a venture-backed company. Why is this the case in the casino? Probably some of the same reasons as in the VC world, including the suspicious look some men give you when you show up at the table looking like someone who could not possibly know what you’re doing, at least according to them.
3. It’s both an individual and a team sport. Only one person can hold the dice and the outcome of that particular roll is that person’s alone to create, but if the whole table isn’t playing to support you, it is no where near as satisfying an experience. When you make an investment, in the end you are the one who sees it through for your fund, but if your partners and fellow board members aren’t there to rally with you, it takes all the fun out of it. The energy of a craps game is built on the esprit d’corps that spontaneously develops among a group of people who didn’t even know each other five minutes ago; it’s not that different in an emerging company, where circumstances put disparate people together towards a common goal. When that team spirit develops, it’s a much better ride, even during those dark moments.
4. Every craps table has one guy who makes it uncomfortable for everyone else. To amplify on that point, there is always that one guy at the craps table who plays the Don’t Pass/Don’t Come line, essentially betting against the rest of the players. Don’t fool yourself, as this happens all the time in venture capital investing as well. You think the people around the board table should be aligned on a common outcome, but all too often that goes awry as companies raise more and more money and certain people become more equal than others. In investments that have long holding periods, there is almost always someone who does better when others do worse. Every board room has a cooler.
5. You are betting on the numbers and praying to hit the right ones. This is a pretty straightforward analogy and if you have worked with early stage startups, nothing could be truer. Young companies are often guessing what they will spend and what they will earn and their backers are praying they come in even close. When that happens, everyone high fives and celebrates, like when you hit the point in a craps game; in that moment, all the people at the table or in the boardroom are BFFs. When the “7” comes up at the wrong time (or whatever number it is that represents the missed financial target), there is a collective groan as piles of money disappear before everyone’s eyes and the blame game begins.
6. The odds are, in the end, against you. You can win a ton of money playing craps when the dice are rolling your way. I have had times where I stood there literally for hours just taking in cash and having that king of the world out of body experience that can happen in Vegas (could be the booze and extra oxygen). During those moments, everyone is constantly counting their chips (even though ill-advised per Kenny Rogers) and marking up their personal value (aka, company valuation) as they ride the hot streak. And yet, because life isn’t fair and the house always wins, it is a lot easier to lose then make money in craps. In venture capital, somewhere between 70%-80% of the deals go bust and everyone loses all the money on the table; there may be no house to win in that case, but there is a table full of losers. And as it goes, most of the wins are small in both games. The big hits are rare and huge and make everyone dance around singing We Are the Champions. The losses are quiet but frequent occurrences, reminding everyone involved that you have to know when to walk away from the table instead of putting good money after bad.

But despite it all, craps, like venture capital investing, is somewhat irresistible once you have done it for a while. And for that reason, I am already planning my next trip to Vegas and always looking for my next great deal. Ready for the coming out roll….