Paul Kedrosky has an interesting post at his Infectious Greed blog about why he thinks that Silicon Valley has gone on tilt.
(http://paul.kedrosky.com/archives/2011/03/the_top_ten_sig.html)
I did try to post a comment with my feedback on Paul’s site but someone (maybe Paul) didn’t think it worthwhile. So, in classic Internet tunnel-around fashion I decided to turn my comment into a post here!

As the writer of the Texas Holdem Investing blog I’ve never seen a poker investing analogy that I won’t comment on. So I feel that I have to give my thoughts on the analogy in Paul’s post and in particular to explore the comparison with poker in a little more detail.

Firstly, let’s take care of definitions – being “on tilt” in a game of poker is when a player has had some losses and starts to play recklessly and at risk levels that are too high in an effort to recoup the losses. As one can imagine going on tilt is usually a precursor to losing all of your “bankroll”.

There are a number of VC-poker analogies that I have written about before (partly in response to Fred Wilson’s postings on the topic). And so here is one more to add to the list.

It certainly does seem that the Valley has gone on tilt with the risk level and pace of recent investments. The interesting piece of this analogy is how to define the “losses” that have caused the Valley to go on tilt.

Everything is going so well right now with valuations on a one-way trend upwards so where are the losses that are causing the players to make reckless high risk bets?
In my opinion the losses are not “actual” losses (or at least not actual crystallised losses).

The losses that the players feel is the fact that most angels / VCs / investors didn’t get in at an early stage with Facebook, Groupon et al. And therefore to compensate for the huge upside that was missed the players are now paying valuations that are too high (bets that are too high risk) in too short a space of time (without thinking through the hands for long enough).

It is all likely to end with at least some losses at this rate, at which point the good players who have avoided going on tilt may be able to make some interesting follow on down rounds to their advantage.

Furthermore, the entry of Harvard MBAs and GS and JPM (the latter two as investors) is perhaps not evidence of being on tilt. The more relevant analogy here may be where some outsiders see a number of good results at a table or casino and decide to get involved. However, they are falling foul of the “this time it’s different” meme and of course it never is.

Finally, Paul shouldn’t be so hard on journalists turning to the world of startups. After all, one of the great investors in the Valley is Michael Moritz of Sequoia who was originally a journalist. In the world of startups it always helps to have an eye for a story and an ability to set it out well.

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An interesting reference to investing in the context of poker appeared recently in the Toronto Sun in the regular piece about “the Poker Dude” entitled “Welcome to the evil world of the bad beat“.

The article goes into some detail about bad beats in poker.  For the uninitiated a bad beat is where you have a great hand and it is beaten in outrageous fashion by a much worse hand that flukes the cards out of left field.

The article describes how every player has their bad beat stories – particularly bad players. Sounds familiar in the investing world where everyone has the story about the great trade they made which then busted out after being up 100%.

But it has an interesting example, which is not really correct.  The bad beat example in question is investing in Enron the day before “it hit the newspapers” about the massive fraud.   However, this is not a bad beat.  As stated earlier, a bad beat is where you have a great hand to start with and through the game, and then a poor hand defeats you out of nowhere.

Enron was not a good hand to start with.  It was an awful hand.  But for the people who didn’t know their investing research (and that was most investors at the time) it seemed like a great hand.  So really, Enron was only a bad beat if you didn’t know what you were doing (and most investors at the time didn’t!).

So the main takes from this are (a) you have to be careful when using poker analogies to investing – they don’t always work, and (b) a bad beat is only truly a bad beat if you lost with a real good hand, not one that you thought was good.