Startups: A Losing Strategy, But Still Your Best Chance At Winning

At their 10-year college reunion, nine investment bankers and an entrepreneur walk into a bar. Guess who’s buying the drinks?

Maybe you’ll think of companies like AirBnB, Instagram, and WhatsApp in the Unicorn Club as you picture a San Franciscan 30-something ordering a round of Don Julio for his buddies. But in reality, the tab’s probably getting picked up by one of the bankers.

Availability bias explains why startup founders are perceived as wealthy and successful:

A person sees several news stories about cats leaping out of tall trees and surviving, so he believes that cats must be robust to long falls. However, these kinds of news reports are far more uncommon than reports where a cat falls out of the tree and dies, which could be more common (Tversky & Kahneman, 1973).

Just replace the word “cats” with “entrepreneurs”. You get the picture.

Founders accept probable defeat to maximize the chance of absolute victory.

Becoming an entrepreneur isn’t a decision to be taken lightly. It’s a years-long commitment to a grueling undertaking that will likely end in failure. So why bet on a losing strategy? Let’s simulate the game and find out.

In this (highly simplified!) version of the real-life game, we’ll take the economist’s view and let "winning” be defined as making the most money; let’s say that happiness, love, and everything else that matters will follow. Our players are ten 20-somethings: nine investment bankers and one entrepreneur. Only one player can win.

Each banker is nearly identical in capability and ambition. They have two possible outcomes after 10 years in financial services:

The entrepreneur’s risk/reward profile is quite different. His odds of succeeding are much lower: 20/80. But if he succeeds, he’ll experience a huge liquidity event that propels him far above the rest of the players.

On a one-to-one level, it would be foolish to bet on the entrepreneur’s success. In a matchup of the entrepreneur vs. any one banker, the entrepreneur would lose 8 out of 10 times. The failed entrepreneur loses against all bankers, successful or failed.

But now, let’s extend the game to the entrepreneur vs. two bankers (who also compete against one another to win). The entrepreneur is still only 20% likely to win. But since the bankers are also competing with each other, their chances of being the overall winner are now cut in half: each is only 40% likely to be the overall winner.

Apply the same reasoning with three or four bankers and you’ll notice a pattern: as we add additional bankers to the game, the chance of any one of them winning decreases. Specifically, the chance of any individual banker winning is 80% / (# of bankers).

But what about the entrepreneur? His chances of winning stay fixed at 20%. In the unlikely case that he wins, he’ll handily beat out everyone else with his significant and virtually unlimited upside.

A turning point arises, then, when the fifth banker enters the game. The odds of any one banker winning are now only 16% – lower than the entrepreneur’s 20%! We’ve now derived two seemingly contradictory conclusions:

(1) The entrepreneur will probably earn less than any one of the other players. (2) Out of all the players, the entrepreneur is the most likely to win.

If you’re probably going to lose anyways, your best strategy is more volatility.

Especially in competitive settings where the odds are already against you, any safe and normal strategy just makes you more likely to lose. This doesn’t just pertain to career choices.

Applying to a school or company with a 5% acceptance rate? The best strategy is to do something unconventional, even when you don’t know if it’ll be well-received. Leave it up to them to decide whether you’re crazy in a good or a bad way; at least you’ll be noticed.

Want to play a game of roulette with the objective of winning money? First of all, don’t. But if you must, play a single round and bet big. The fewer rounds you play, the greater your volatility and therefore your chances of beating your negative expected value.

Thinking of approaching that cute blonde at the bar? So is everyone else. Ignore the blonde and go strike up a conversation with her friend, instead.

Dare to be different. In the end, it’s your best bet.