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May 17, 2006

When and When Not To Bet The Company

You DON’T bet your company on tactics.  You don’t (or shouldn’t) bet your company on every decision you make.  This discussion started with a great post by Fred Wilson correctly saying that CEOs of venture-stage companies have to bet the company every day.  It continued with my last post saying ditto for Fortune 500 companies.  NOT betting the company explicitly means that you’re betting it implicitly on the status quo – not smart.

But reader Steven Goldstein comments:

“Tom, I usually love your posts but this is the danger of cliches. I think CEOs need to know what they're betting on. If they don't, well then they're probably screwed. But there's no reason you can't be making a portfolio of bets. You're citing a few examples over many years to back up a bad cliche. Poker players don't head to the table looking to go all-in as soon as possible. The best players have a portfolio or ‘chip-management’ approach. And I think that transfers to managers as well.”

Let’s stick with Steve’s Texas Hold’em analogy; it’s a good one.  When you sit down at the table, your whole stake is at risk: you aren’t gonna get up until you bust or win.  Your strategy is that you’re going to risk your stake (company) on luck and your poker skill.  But most hands are tactical.  You want to play another hand.  So you don’t go all in unless and until your survival or your strategy require it.

Enough of the analogy.  You are a CEO.  You have some key assumptions about your market, your technology, the state of the world, what’s likely to happen next - especially what’s likely to happen next.  And you and your team build a strategy based on those assumptions.  You can’t wait until you have all the relevant facts; that’ll never happen (except possibly in business school).  Some of the facts are unknowable because they haven’t happened yet.  You still need to have a strategy and you need to bet the company on it.

Why?  Why not bet half your company as Steve suggests?  Because somewhere there’s a competitor who’ll bet all of her company.  She’ll take you out because you’re only half committed and she’s willing to go all in.

But what if your company is much bigger than hers? Ten times as big?  Then you can bet less than all your company and still have more resources in play and at stake than she does. Right?  No.  Sounds right but it’s wrong.  This is the BIG COMPANY FALLACY.  This where the poker analogy breaks down.

Tactically, it is perfectly true that you can and should make a portfolio of small bets and be prepared to abandon them without serious damage if you’re wrong.  If the issue is just tactical, you can afford to let the little company go first or you can commit enough resources to stay ahead of them without going all in.  Hell, if they’re right you can always buy them and the worst that’ll happen is that you’ll overpay a little.

But, if the issue is strategic, betting the company means a lot more than just putting a lot of money on the line. Betting the company means purposing everything and everybody in the company towards the strategic goal. It often means ruthlessly cannibalizing the cash cows.  In fact, the cash cow problem is usually what stops big companies from making the bets they ought to.

When Bill Gates decided to bet the company on Windows, there was lots of resistance from the application group.  Not gently, he said that EVERYTHING would be written for Windows and the Mac GUI.  No more DOS versions except minor revs. “But,” developers said accurately, “Windows sucks.”  Version 1.0 certainly did.  It wasn’t right until 3.0.  But Word became a Windows ap.  Excel, which had started on the Mac and given the application developers vital GUI experience, replaced DOS-based MultiPlan.

“But Windows is gonna be late.”  Didn’t matter; Bill had bet the company.  He famously won.  It wasn’t the money they spent on Windows development that was the risk.  The risk Microsoft took was in the commitment of the entire company.  That’s the corporate equivalent of going all in.  That’s the risk that Microsoft was so well rewarded for.

On tactical stuff, Microsoft doesn’t bet the company.  Somebody comes up with a better database than what’s being developed internally, buy it.  Better mail program (before mail became strategic), buy it.  Etc.

AT&T, to its credit – or at least to Alex Mandl’s credit – realized by 1994 that the Internet was strategic.  Even hired an Internet radical like me and let me launch WorldNet with surprisingly little interference.  But AT&T wasn’t willing to bet the company on the Internet.  It had a cash cow problem.  It had a quarterly earnings problem. It had a valuation of its “intelligent network” problem.

Lots of people who had a lot to do with components of the Internet were at Bell Labs.  David Isenberg at the Labs figured out why the “stupid” network was such a smart idea; that essentially cost him his job and started his prosulting career.  But AT&T couldn’t bring itself to bet the company.  So it lost the company instead.

Fred Wilson’s  original post on betting the company is here.

Mine is here.

More on David Isenberg and his famous paper is here.

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