* If you don’t know the rules of Texas Hold’em, here is a simple summary courtesy of Wikipedia.
What is the “short stack advantage”?
In poker, the term short stack refers to a player who has fewer chips compared to the other players at the table.
The short stack advantage is a strategic concept that recognizes certain benefits or strategic options available to the player with a smaller stack.
The main advantage of being a short stack is the ability to play a simpler, more straightforward game. Since the options for complex betting strategies are limited by the smaller stack, decisions often boil down to whether to fold, call, or go all-in. This can make it easier for the short-stacked player to make decisions and can sometimes make it harder for opponents to make risky bets against them.
Another benefit of the short stack advantage is the psychological pressure it can put on opponents. Players with larger stacks might be more hesitant to risk a significant portion of their chips against a short stack, especially if the short stack is willing to go all-in. This can give the short stack leverage in certain situations, allowing them to steal blinds and antes more effectively.
However, having a short stack also comes with significant disadvantages, such as a reduced ability to survive losses and less flexibility in play. The concept of a “short stack advantage” is more about maximizing the potential of a less-than-ideal situation rather than an outright preferable position.
This position of needing to maximize the limited leverage of a less-than-ideal situation is one that startup entrepreneurs face every day. However, the lessons of the short-stack advantage are particularly relevant to startups that are facing larger, more well-resourced incumbent competitors. In these contexts, startups need to leverage the few opportunities they have to outcompete, outperform, or out-innovate their better-equipped rivals.
That’s why I’m sharing my 8 lessons that startup founders can learn about poker’s short stack advantage. They are:
- Simplified decision-making
- Increased “fold equity”
- Psychological pressure
- Lower risk of elimination
- Easier double-ups
- Opportunities for aggressive play
- Simplifying opponents’ perceptions
- Weathering storms
Simplified decision-making
With fewer chips, your decisions are often simplified to folding, calling, or going all-in. This can reduce the complexity of decision-making, making it easier to play in high-pressure situations.
Entrepreneurs with fewer resources must also make more straightforward decisions, focusing on critical actions that drive the business forward. This constraint can lead to clearer priorities and a lean approach to problem-solving, avoiding the paralysis that can come with too many options.
Lesson for founders: Reduce decision-making complexity by creating 2-3 North Star metrics and focus exclusively on them before expanding your scope to accomplish more.
Increased “fold equity”
When you go all-in with a short stack, opponents might fold more often, not wanting to risk chips against a potentially strong hand, even if the actual risk is relatively low. This can increase your “fold equity,” or the value you gain from opponents folding in response to your bets or raises.
In the startup context, “fold equity” is experienced when a nimble, fast-moving startup puts pressure on larger incumbents by innovating in areas that may be unprofitable or risky for them to invest in, forcing them to either compete in less favorable conditions or cede that space to the startup.
Lesson for founders: When facing larger, better-resourced competitors, consider the opportunity cost they would sacrifice to compete directly with you. If you can find a market or segment where that opportunity cost is high, you may be able to buffer your venture from direct competitive risk.
Psychological pressure
Opponents may be more cautious in playing against you, fearing the simplicity with which you can decide to risk it all. This can lead to opponents making mistakes or playing more conservatively than they might against a player with a larger stack.
A nimble startup can put pressure on larger competitors by rapidly innovating or capturing niche markets. The threat of a small but fast-moving company can lead larger businesses to make defensive moves that may not be in their best interest in the long term.
Lesson for founders: When facing larger competitors, your only meaningful competitive advantages are your nimbleness and speed. If you make an aggressive move, be sure to focus on markets or customers who are just outside of the competitor’s core business, forcing the competitor to decide whether to stick with their core or make a move that they are not best equipped to make.
Lower risk of elimination
In tournament settings, players with larger stacks might avoid tangling with you to prevent risking a significant portion of their chips, which can sometimes give you a buffer to survive longer and climb higher in the tournament standings.
Smaller businesses often fly under the radar, allowing them to grow and develop their product or market fit without attracting the full competitive force of larger players, which might stifle their growth early on.
Lesson for founders: Competitors tend to focus on their closest, most dangerous competition. This allows challengers to quietly go about their business without attracting aggressive moves from the competition. Take advantage of this opportunity. Rather than engage in aggressive marketing and promotion early, wait until the right moment when you are ready to compete before stepping out of the shadows and into the competitive arena.
Easier double-ups
When you do go all in and get called, you have a clear chance to double up. While this is also true for larger stacks, the psychological effect of potentially eliminating a player often leads to more calls when you’re all in, thereby increasing your chances of doubling up.
For startups, a “double-up” could mean a sudden breakthrough or deal that significantly advances the business. With less to lose, a bold move or innovative approach can sometimes lead to significant partnerships, funding, or market share gains.
Lesson for founders: As Peter Thiel said, “Once you’re 10x better, you escape competition.” So play aggressively and go “all in” when the combination of opportunity, offer, and timing seems right. Virtually everything must go right to outcompete an incumbent. So don’t play soft. Otherwise, your better-resourced competitor will simply whittle away at your stack until you have nothing left.
Opportunities for aggressive play
With fewer chips at stake, you can afford to play more aggressively in certain situations. This can be particularly effective in stealing blinds and antes, especially in the later stages of a tournament when blinds are high relative to stack sizes.
Startups can often afford to take risks that larger companies can’t, whether it’s experimenting with a new technology, business model, or market. This agility can lead to breakthroughs that larger entities are too cautious to pursue.
Lesson for founders: Conservative play will rarely outcompete a well-resourced incumbent. Play aggressive. Try new things. Make huge product leaps. Be hyper-creative with marketing. And if it doesn’t work, iterate quickly and try again before you’re out of runway.
Simplifying opponents’ perceptions
With a short stack, your range of possible moves is perceived as narrower, which can sometimes make it easier to surprise opponents with unexpected plays, as they might pigeonhole you into having only strong hands when you go all-in.
Larger competitors may underestimate a small startup, seeing it as a one-dimensional player. This underestimation can provide the element of surprise, allowing the startup to carve out a unique position or disrupt the market unexpectedly.
Lesson for founders: Yet another reason to fly under the radar longer. When you keep competitors on their toes, your moves will be harder to predict. Since they think you are limited in your options, think outside of the box and try unexpected angles. Your unpredictability will be an advantage, since larger organizations, by nature, will be easier to predict.
Weathering storms
In tournament play, the short stack can leverage the structure of increasing blinds and the pressure it puts on medium stacks to maintain their position relative to the rising cost of play. This can sometimes allow short stacks to outlast other players and jump in the standings without significant action.
In the entrepreneurial “tournament,” startups might outlast other businesses by being more adaptable and resilient in the face of industry changes. The pressure of limited resources can forge a more determined, resourceful team that can pivot and innovate as needed to survive and thrive.
Lesson for founders: Again, consider your opportunity costs compared to those of your larger competitors. In the face of market downturns or unexpected external pressures, it is harder for larger companies to scale back their operations or efforts. Meanwhile, nimble startups can scale back, pivot their strategies, or go into temporary hibernation to conserve resources and wait out the storm.
TL;DR
- The short stack advantage in poker, where players with fewer chips strategically leverage their position, offers valuable lessons about competition for startup founders.
- Startups, much like short-stacked players, face constraints that require a focus on simplicity, strategic aggression, and psychological leverage.
- Resource limitations can spur innovation, clear decision-making, and the ability to outmaneuver larger competitors, displaying how constraints can be a catalyst for creativity and success in the startup world.
- If you’re a startup founder, don’t just listen to entrepreneurs and investors. There is a wealth of relevant wisdom out there in unexpected places (like poker)!
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