One of the most frequent mistakes I see entrepreneurs make is in partnering with other start up companies. It can be as simple as relying on a young company for a critical piece of technology, or having a start up in your supply chain, or even working with a small, unproven company in some ‘non-critical’ part of your company’s operations.
The allure of working with other start up companies is undeniable. As struggling entrepreneurs, you are ‘brothers in arms’. They are eager to prove themselves and more likely to work with you and be flexible. Simply put, they just ‘try harder’.
Why Shouldn’t Start Ups Work with Other Start Ups?
Simply put: Start ups fail.
While this statement should not come as a revelation to anyone — least of whom, anyone with any entrepreneurial experience, I’d like to walk through a through experiment with you to drive this home and help you internalize this concept.
For this exercise I’m going to borrow a formula I first became familiar with while doing online marketing for the sports book industry in the 90′s. Please bear with me for a moment while I explain.
The Parlay Formula
One of the biggest moneymakers in sports booking is the ‘parlay’. To win a parlay (often 3, 5, or even 10 team parlay), the bettor must correctly wager on the winning team 3, 5 or x number of games.
In any given contest the sports book looks to even the betting on both sides (and thus maximize the chances of getting the ‘juice’ or ‘vig’ for the entire book). That said, roughly, by throwing darts at a board you will have close to a 50/50 chance of winning on a sports bet. Expressed as a decimal, that is .50.
Bettors are attracted to the parlay because a winner will be paid better than in x number of separate standard wagers. For example, a 3 team parlay will typically pay 5 for every 1 wagered.
Why the Parlay is a Sucker’s Bet
While every bettor figures they can choose the winner of three games and thus win 5x their wager, the fact of the matter is that most don’t understand the math of probabilities working behind the scenes.
To accurately calculate the chances of a parlay bet coming in you have to take the probability of any individual bet being wagered correctly: .5
Then, take the probability to the power of the number of consecutive bets which must pay off…. In the case of a three team parlay, this is 3.
So, to calculate our odds, we calculate:
.5^3 or .125.
If we express this another way, that is a 1 in 8 chance to win 5x.
If we add just one more game to the mix, the chances for success drop to .0625 or 1 in 16
What Do Sports Book Odds Have to Do with Start Ups?
Each and every variable you place in your critical path to success increases your odds of failure exponentially. Literally.
Start ups, meanwhile, have a much higher failure rate in general. So, placing young companies anywhere in your critical path accelerate the exponential formula’s decline towards zero.
By way of example, if we are ‘betting’ on three outcomes each with a 30% probability of success, the predictive formula looks like the following:
.30^3 = .027.
Or, expressed another way, three things that have to work out that each have a 30% chance of succeeding give your project a 2.7% chance of success.
That’s the definition of ‘long odds’
Lessons from Your Bookie
Like any good bookie would teach you, you increase your probability of success in two ways.
1.) decrease the number of successful outcomes necessary for overall success of your project
2.) ensure each critical factor which defines your success is as close to a ‘sure thing’ as possible
I hope this article was able to provide you some food for thought. If you have any comments or questions, go ahead and drop me a note. It’s a dofollow link for anyone with relevant commentary.