Project Poker

My partner Samer is doing an exceptional series on the importance of having a real strategy if you are looking to extract value from strategic investing. Part 4 is the importance of Business Model Formulas . If you doubt the importance of writing down the formula, read Sheel's breakdown on the disastrous financial impact of the Bilt / Wells Fargo rent rewards credit card that is costing the bank millions per month .

The lesson isn't to avoid doing deals, it's to do it them the right way.

With three decades of deal experience, I've realized there is a significant difference between large banks and small banks driven by their perspective. Both are wrong.

Large institutions tend to be overly optimistic. This is no accident. Big businesses need to see a big impact to move the needle on their business. The cost of building a product or partnership can quickly outweigh the benefit of incremental projects.

Small institutions, by contrast, under value opportunities. The orientation is to avoid risk. Many would rather give up growth than take the risk of being wrong. The is the commercial lender mentality where the danger is putting too much risk into the book.

Both are poor strategies.

If you play Texas Hold'em or at least have seen an episode of the World Series of Poker, you know a player that repeatedly goes "all in" or folds on the first card won't be at the table long.

The key is to invest just enough to get more information whether you've been dealt a winning hand. In this case, based on the probabilities, betting enough to stay in the game and see the next card.

Here's how to play partnership poker:

Lay out the assumptions. You'd be surprised how of projects don't have the actual formulas and assumptions written down. You need to make sure the math is mathing as Samer outlined in his post.

Stress test. How rosy do the assumptions need to be for this to have a big impact? How pessimistic before there is no way this is a good idea? Are there data points from other projects or the market that can inform

Reasons to believe. What do you need to believe to get comfortable with these assumptions? How can they be tested? In what order can they be tested?

Avoid the Underpants Gnome. If you don't understand this reference, quit reading and Google "South Park Underpants Gnome." Product poker is a series of incremental bets. Just because something can be built doesn't mean it should be built.

Avoid vanity. Not all metrics are created equal. Just because it can be measured doesn't mean it matters. Customers signing up for free products or even worse, free money, is rarely an indicator business viability. Alex Johnson is fond of saying giving lending money is easy; getting paid back is hard.

Minimally valuable investment. It is easy to focus on the R in ROI. Return is important. Incremental improvements slow the crawl to irrelevance. The key is to find the minimal amount of investment to prove out the path to big impact. Learnings from these investments allow course corrections before it's too late. Smaller investments also allow more opportunities to get funded creating a portfolio of potential winners.