Understanding the Distribution of Outcomes

January 22, 2024

The fear in his voice was unmistakable.

It was the weekend that Silicon Valley Bank failed. My friend called me to help him brainstorm a way out. He was in the middle of securing a second round of fundraising for his new company, and now, in one fell swoop, not only did access to new investment capital dry up overnight, but he had lost access to his remaining funds – the literal lifeblood of his company as he completed his next raise.

He had already invested everything he had into this new venture, pouring his heart, soul, and every last dime into it. After selling his last company, he was all in on this new effort, swinging for the fences. And now, everything hung in the balance.

What would happen if events beyond his control caused him to lose this new company overnight? Where would he be? What would he and his two young children do?

It was a stark reminder that in the blink of an eye, everything can change. It’s not just startups that are at risk – even established businesses and individuals with substantial wealth can be brought to their knees by unforeseen events.

But as I spoke with him that day, brainstorming options, I realized something important: he was not alone.

There were thousands of others out there just like him, facing the same fears and uncertainties, but unsure of where to turn for help.

He got lucky. The government-secured bailout came on Monday, and in the blink of an eye, it was business as usual.

I knew the fear in his voice because it’s a fear that I have felt deeply. As entrepreneurs, we play full out. We double down and bet on ourselves, pushing our proverbial chips all in, again and again. But somewhere along the way, the risks that we take outweigh the potential rewards.

We have to shift from being an accumulator of wealth to becoming a defender of wealth.

This weekend, I had the distinct pleasure of being invited to a mastermind hosted by one of the world’s top poker players. One of the reasons I love events like this is that it takes me out of my echo chamber. Entrepreneurs tend to view the world a certain way, and professional poker players and traders tend to view it very differently. It’s these contrarian views to my own that I seek to integrate.

As we sat at the lunch table the conversation turned to risk and understanding the distribution of outcomes. Poker players are relentlessly taught to be desensitized to the outcome and only focus on decision-making. The reason is that if you play hands correctly enough times, eventually the distribution of outcomes will reward correct play.

However, what is often overlooked are the swings in between the reversion to the mean. On the way to victory, despite playing the hand correctly, a player may lose more than they ever thought imaginable before there is enough time for the outcomes to normalize.

Entrepreneurship is exactly like betting. We have three jobs essentially when making an entrepreneurial bet: 1.) assess the upside potential of the opportunity, 2.) assess the likelihood of that upside coming to fruition and 3.) understand and protect the downside.

It’s the second two that we entrepreneurs are particularly bad at. Poker players watch the odds play out over tens of thousands of hands. This sample size ensures that, while the distribution of outcomes varies widely, eventually they revert to the mean and play out as the odds suggest.

This simply isn’t the case with entrepreneurship. We don’t get very many at-bats, and certainly not enough to simply take risks, have a disciplined process, and wait for the odds to play out in our favor.

We have to make every bet count, so downside protection becomes much more critical than assessing the upside.

And this is where we get caught out. I talk to a lot of post-exit entrepreneurs and something many (including me) have in common is losing money on a failed venture after selling their first one.

​If we shift our viewpoint, we can learn a valuable lesson. If we looked at these ventures as bets like a poker player, we would come to understand that if we play the game long enough, losses are not only probable, but they are inevitable. 

If you knew total failure was a statistical inevitability, how might your view of protecting your downside change? At some point, it’s no longer as important what the upside of the hand is – it becomes about placing enough bets and staying in the game.

And so back to the SVB debacle. This is my friend’s second company. As I mentioned, he’s all in on this one. If we viewed catastrophic events like SVB as not only possible, but inevitable, how might our decision-making change? 

Many of us were not business owners in 2008. The only thing about the crisis I can be sure of is that it will happen again at some point – and perhaps sooner than we think.

Knowing that’s the case, how could you better protect your business (and your personal net worth) so that when the inevitable strikes, you are not only protected but poised to take advantage of the massive opportunities created by those who weren’t?

This is the question I’m finding myself pondering more and more often. In a world where I only get a few bets, I know two things: I must protect my downside so that I stay in the game, and doing so allows me to best take advantage of life-changing upside opportunities.

No one has a crystal ball, but once we acknowledge that all outcomes along the curve are going to be experienced given a long enough time frame, then we are truly playing a game that we cannot lose.

To never getting knocked out of the game,


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