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Why the MIT Blackjack Team Became Entrepreneurs
An anonymous reader writes "The MIT Blackjack Team, made famous by the book 'Bringing Down the House' and the movie '21,' learned important lessons about running a business when they were beating casinos in the '80s and '90s. Key members of the team went on to start influential tech companies like SolidWorks and Stanza and invest in startups. Why did they do that instead of becoming, say, hedge fund managers? MIT entrepreneurship leader Bill Aulet moderated a team reunion panel in Boston, and he writes that the themes that carry over from blackjack to startups include staying disciplined, playing for the long term, and not taking unnecessary risks. And, of course, disrupting the powers that be."
Why did they do that instead of becoming, say, hedge fund managers?
Because they wanted to do something meaningful?
Or is it because hedgefund managers are only good at making money for themselves in fees than in actually making money for their clients.
And studies have shown that hedge funds do worse than the market over the long term.
That is what is really the reason, in my opinion. They made enough off of their BJ work that they could afford to take high level risks without losing their house (literally) and they didn't need investors so they would own all of the rights to their products.
There are tons of people who are great programmers or have good ideas that don't bother because they need to work day-to-day to pay their bills and make sure their family has food on the table.
~ kjrose
Plus, money aside, they obviously have high natural risk tolerance. There are lots of people who, if they were rich enough to start a company, still wouldn't, and would invest in established companies instead.
[Sir Garlon] is the marvellest knight that is now living, for he destroyeth many good knights, for he goeth invisible.
well it's actually a lot easier if you can start something like solidworks and profit from it than being a hedge fund manager..
world was created 5 seconds before this post as it is.
Only when we realize there is no correlation between skill and success in Wall Street, we would structure their risk/reward ratios in a more sane manner and bring some kind on sensibility to the market. Think about it. If the market is all knowing and all powerful, then why do companies that go under the market, get bought by private equity and then come back into the market and get valued highly?
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
This isn't a case of "they won at blackjack therefore they go on to be in startups." Seems to me it's something in their personalities that causes them to be willing to undertake high risk/high reward ventures. One way or another, they're going to get their thrills.
Apologies for drifting off-topic, but my perception of risk is very different from yours.
You stand to lose a good deal more than that. You stand to lose:
So the risk equation you're looking at is that you stand to lose at least double the salary you pay yourself (what you lose, and what you give up as opportunity cost) and probably a good 50% overhead on top of that on the downside. The upside is effectively unlimited (see Google, Facebook) but the chance of failure is pretty high. I leave it as an exercise to the reader to research the failure rate of tech startups.
An alternative is a pretty reliable 10% annual return through run-of-the-mill stock investments.
My rule of thumb is, if the ROI is not better than you would get from an index mutual fund, then you should either be getting substantial non-financial rewards (doing what you love, feeling that you are making the world a better place, etc.), or you should liquidate everything and invest to get the reliable dividends you can't produce for yourself.
[Sir Garlon] is the marvellest knight that is now living, for he destroyeth many good knights, for he goeth invisible.
They had the money. I've dabbled some in angel investing myself, for the same reason, and I know others in the same boat.
What's really high risk about starting your own company? Especially when you aren't taking out any loans to do it.
Emotional investment. You are much more likely to throw good money after bad if you are emotionally attached to a bad investment.
You almost always want to use other people's money to start a company; it spreads the risk over a larger pool. Even if you angel yourself to get the ball rolling, if the company fails -- and most do in the first year -- then you'll still have living money, and the ability to angel your next company - or someone else's. Or don't hire yourself to run your own company beyond your level of competence. In fact, I would typically recommend that you angel other people, rather than angelling yourself, and have other people angel you instead. You need this type of interaction to get an external reality check on whether your idea or product or business plan or management ability is crap.
Their big example in the article is SolidWorks, and it was pretty clear that they went with an acquisition exit strategy (they sold out to Dassault Systèmes for $310M), rather than staying entrepreneurial.
Yes, and also the T in MIT stands for "technology".
Curiously yours, crip.
They made enough off of their BJ work
Knew a girl who did that.
systemd is Roko's Basilisk.
What's really high risk about starting your own company?
Depends on the company you decide to start. A small consulting firm hardly has any risk other than opportunity cost. A manufacturing company on the other hand has very substantial capital requirements which involve a lot of risk. A software company can have relatively low startup costs but scaling it typically involves quite a lot of risk due to the expense of trying to sell the product.
If you're just developing software, it doesn't cost anything but your time (and the other developers), and the cost of a few computers.
Not even remotely true. Look at the income statement of any software company. Microsoft, Oracle, you name it. Go ahead, we'll wait... You'll notice that engineering costs are about 10-15% of the total cost of running the business. Most of the cost is in sales, marketing and administration. You will not have time to both build the product and sell it at the same time. To get any scale you are going to have to hire people to help you and your burn rate just increased dramatically. Furthermore if the product you are making is non-trivial you'll probably need additional developers with their attendant salary requirements. That means you need to find more money. Banks generally will not loan to you without a personal guarantee and assets to back it up which means you quite likely will be either betting the house (literally) or you will be selling significant percentages of the company to raise equity investment. Pretty risky either way.
If you can develop a well needed product, the payout is immense.
Speaking as someone who has started several companies, even if your product is in demand that is no guarantee of a big pay day. It's a LOT harder to build a successful business than do just build a good product.
Absolutely not true. Those kids made money, but not nearly as much as the Hollywood version of the movie "21" depicted. Their winnings certainly weren't large enough to fund a tech startup. For example, I know for a fact that Solidworks was initially funded by a venture capital group, not from the personal assets of the founder, Jon Hirschtick, a member of the MIT blackjack team.
The risk is that you don't just develop a product, you need to market it, actually get paid by people for using it, manage other people, pay other people before actually having any cash flow, etc.
Start-up capital doesn't reduce risk, it creates a buffer on cashflow.
Risk tolerance is what differentiates an entrepreneur. A *successful* entrepreneur also needs discipline and vision.
I think they just learned the lesson of Las Vegas. Vegas basically started out as an organized money skimming organization fronted by gambling operations (i.e., attempting to make more money by bypassing part the system). After a while, the proprieters found that once they figured out how to run the above board business, it was way more lucrative than the illegal part which means you might as well just concentrate your efforts on the above board business (or suffer the opportunity cost of not doing so).
Basically the lesson is that there's lots of money to be made out in the world by people with skills who get out of the small game and learn how to play the bigger game.
Spot on. I knew several members of the second "reptiles" team, and was even recruited to join them (they typically sought out people who are strong in engineering or math, who also have a boisterous personality, which, I'm told, I have =)
The managers had salaries that ranged in the $150k ~ $200k range (including bonuses)... where as the players (spotters and the BPs) were typically brought on as 1099-MISC independent contractors, almost all of whom had regular day jobs (think: engineers or technical managers at Google, Facebook, Apple, etc.) As a spotter or BP, you had to commit to 3 weekend trips every 2 months (with preferences to the long holiday / 3-day weekends), and during the trips you had to have 3 12-hour shifts, with short breaks in between for eating, sleeping, etc. Pay for the independent contractors were a guaranteed $75/hour for hours worked during the weekend, plus a small percentage (I believe it was something like 1.5%) of the total earnings from a weekend's trip (if any), split evenly among the team members that attended that trip. (Travel, food, accommodations, transportation, etc. were all covered). The players were not penalized if the trip ended up having losses.
For the managers, it was a regular job. Averaged out to about 40-50 hours per week, and they were making a decent salary at $150k ~ $200k. But considering that they were all 8-12 years out of college, graduated from MIT or another elite university with an engineering or math background, and living in the SF Bay Area (no, they were not in Las Vegas as "21" or "Bringing Down the House" would have you believe), most of their cohorts were likely making similar salaries at regular, more "mainstream" companies in Silicon Valley.
For the BPs and spotters (e.g. the 1099-MISC contractors), it definitely was decent side income. From talking with my friends on the team, it was pretty mentally grueling ("the Monday or Tuesday after I get back to work I'm a total zombie")... but the side income (usually about $3000 ~ $3500 before taxes per weekend trip) was definitely nice to have, especially for engineers who are maybe making $120k or so with their "day job", the 40~50% or so bump in salary was definitely enjoyable.
But as you can see with these numbers, they were definitely not breaking the bank with any of the money they were making here... definitely not enough to self-fund any future entrepreneurial activity.
And case in point: as the team has now ramped down, a majority of these people ended up going to get MBAs at the various top-10 business schools across the country (Sloan, Wharton, Haas, HBS, Stanford GSB, and of course Kellogg), kinda like everyone else who pursued a more "mainstream" career track.