What counting cards at blackjack can teach you about VC investing 

Venture Capital (VC) can be a rewarding place you could invest your money. But nowadays, some are reconsidering whether to invest in VC as an asset class at all. A number of VCs have responded by “reducing risk” and slowing their investments. I’m a VC myself, and everything I know about high-pressure bets I learned while playing blackjack.

I left the Soviet Union as a child in 1979, eventually settling in the U.S. as a refugee. Years later, I was attending MIT and I joined one of MIT’s blackjack teams. We won millions from various casinos by counting cards and inspired the book and the movie 21. We weren’t doing anything illegal, but the casinos definitely didn’t like us.

Counting cards isn’t illegal and it isn’t magic either. We simply used a probability model, and some basic math. Assuming we all played the way the algorithm told us to, we could predict the results. Yet it’s no coincidence that several of my MIT blackjack teammates went on to build billion-dollar companies, or that I ended up investing millions into tech startups. Counting cards has a lot in common with the worlds of risk, technology, and cut-throat entrepreneurship.

I didn’t stay very long in the world of flashing casino lights. We made a few million playing blackjack, but we played a zero sum game like Wall Street traders do, without actually creating any value for anyone. It’s infinitely more gratifying to invest in and mentor companies whose customers actually thank you.

Fast forward to 2017, and I launched a VC fund for immigrant-founded startups. Still, much of my card counting skills come back into play when I’m placing a bet on the right product, or assessing a founder’s ability to soar above competitors. The one ingredient that was missing back then was meaning. This is what I took from the blackjack tables to the board rooms, and how it helps me understand today’s more risk-wary VC climate.

It’s not random chance, it’s math

At the blackjack table, all you see are the few cards in front of you—the rest is unknown. But the difference between a gambler and a card counter is that one is playing luck and emotion, and the other is playing the data.

We had to think probabilistically, memorize some simple arithmetic, and have a decent memory. The cards you see affect the probability of distribution, and with that little data you have to project likelihoods. Our margins were slim, about 1% or 2% of what we put in, but we knew that if we stuck to the process over time we’d come out with a profit.

That strict belief in the science—that if we made the most objective decisions based on the data, we would win—is fundamental to my current decision-making process as an investor. The margins are much wider, of course: Good VCs will accept more than a 50% chance of a company failing, but can also 10x their investments in a few years. But the principle of applying near-scientific rigor stays the same.

VC is about making bets with all the information you can get for outsized potential gains. When I consider a company, I assess the probability of it succeeding, multiplied by the amount we stand to earn.

This is hard because unlike in blackjack, VC doesn’t have a formula to predict a founder’s value generation, their ability to build a team, or their product’s potential. Thinking probabilistically for us ultimately comes down to pattern matching, remembering decisions over a long period of time, and being honest about mistakes that you’ve made.

I match patterns I’ve seen before in successful companies, and remember data on industry trends, market opportunities and positive founder traits. When you’ve been investing for decades, you know which types of founders have a rare combination of skills and experiences that make them good bets.

Though I often look like I’m taking a risk on a company, I’m actually being quite careful and rational. So when I hear about VCs trying to be risk averse, it sounds less like venture capital and more like a regular business investment. The difference between VC and most other forms of investment is that if you don’t expose yourself to perceived risk, edgy startups, or unconventional ideas, then you will never set yourself up for huge returns.

Don’t make emotional decisions

In the casino there’s an emotional environment meant to suck people in, and create an exaggerated urge to act on your feelings. Gamblers might feel that they’re on a streak, and respond to whether they’re already winning or losing, not the probability of the cards.

There’s a temptation as humans to deviate from what the math tells you to do. For a card counter who sees that they’re losing again and again, it takes nerve to stick to the original plan.

But if you don’t bet the optimal amount the situation tells you to—high or low, depending on the data—you won’t have that marginal advantage. So, emotional decision making will ultimately push you to lose.

When it comes to VC, an investor might perceive that all their investments in last-minute delivery startups, or AI, are quickly multiplying in value. So they place most of their eggs in the one basket. Or, they see that they haven’t been getting returns from their biotech investments, so they pull out.

A smart investor knows that they’re playing the long game. They know that an overhyped market could lead to a bubble. They know that a niche that’s slow to develop could give them the most outsized returns in the long run. They just have to keep their emotions in check and not be reactive when valuations are spiking or everyone else is jumping ship.

Nothing’s impossible until you get the proof

Conventional wisdom decades ago said the house always wins. There weren’t movies showing us otherwise, and anyone who spent too much time at the tables was perceived as having a gambling problem. Then, someone proved that you could actually beat the casinos.

We were taught the basic methods for counting cards, then further developed those techniques. We knew that it was possible using the method we had perfected.

Likewise, I don’t take the assertion that a certain entrepreneur’s goal is “impossible” at face value. I take it as an opportunity to back something that no one else has been able to do.

Smart investors will be unfazed by naysayers when they see the right chance in front of them. So if a founder says they can do the impossible, I make some reference calls. And even if those experts tell me it can’t be done, I ask them to double check and talk to the founder. Sometimes, it turns out to actually be feasible.

You want to see a similar determination in all founders who approach you. You want to see in them a robust vision of the future, a belief in their goal regardless of how many people tell them it’s too risky. They must be willing to make their own bets. Even in the most innovative spheres of entrepreneurship, not everyone is willing to look past consensus.

For example, if a VC examines a startup’s target market and sees that there are already strong competitors who are doing well, they’d probably tell the founder: “You don’t need to launch a company to do that, others are way ahead.” Founders have to refute that statement, show you that they understand that there is competition, but lay out a plan in which they can prevail.

How do you know if a founder really can make the “impossible” possible? They have to be able to explain why. They need to hear the questions you’re asking, and have a good answer that even non-experts will understand. It shows they have a broader view of the market and their user base, and are able to step back and take stock of their business.

I’m glad I left blackjack when I did, but I’m also appreciative that it gave me my first experience as an investor. Back then it felt like the greatest thrill in the world to make fools out of the casinos. But now I can take that rational, probabilistic thinking and apply it to the far greater stakes of trying to find the companies that are going to change the world for the better.