A puzzle from Sergei Bogdanov of the YellowRocks fund: it is the turn of the man in the orange shirt. Who at the table has a good hand, and who has a bad one? Sergei’s answer is at the end of this note.
At Re:Location Summit in Barcelona, Sergei broke down the ABCs of venture through poker: how a player’s decisions at the table mirror an investor’s decisions on a deal. The comparison is not decorative. YellowRocks has been investing since 2013 and holds more than 70 companies, and Sergei won three poker tournaments this year.
Six takeaways I noted down
1. A correct decision can still lose. Going all in with pocket aces is the right move, even if your opponent hits the card they need. Judge decisions over a hundred hands, not one.
2. Trust your intuition only where you have been a hundred times before. In a new situation, go slowly and cautiously.
3. Discipline is a funnel. 4,086 companies entered the fund’s pipeline, and 18 got a deal.
4. Look at the quality of the numbers, not their size. One portfolio company showed beautiful revenue at entry; the unit economics turned out far worse than the founders presented. Growing revenue with shrinking margins is not growth, it is decoration. So write down what you were promised: the founder’s plan in a spreadsheet, the actual results right next to it.
5. Follow the system, but know when to step outside it. The fund has clear selection criteria, plus green flags strong enough to outweigh the rest. The main one: a serial founder with a proven track record.
6. Know in advance when you are going to fold.
The uncomfortable part
The most uncomfortable point came up after the talk. The fund determines within about three months whether a company is taking off. The ones that are not flying do not get “fixed”: all attention goes to the stars. For a portfolio of seventy bets, that is honest math.
I asked: “So who fixes the others?” The answer: “No one.”
The fund has seventy bets. A founder has one company, and there is no second hand.
Which leaves a question worth asking before you take the money: if you are not among the stars by month three, who is in your corner?
Sergei’s answer to the puzzle
Everyone staring at the man in orange has a weak hand. Whoever is afraid freezes and watches, like an antelope that has spotted a lion. So he should bet big with almost any cards, and everyone will fold.
Sergei’s advice: when the stakes are small, pause and look at the table. If everyone is looking at you, bet big.
Thanks to Sergei for the talk and the conversation.