I’m a nerd. Throughout the years, I’ve run the gamut: DnD, MMORPGs, metal festivals, Mathematics Olympiad, you name it. In my quest to actively embrace all nerdery (ok not you, LARPing), only one struck a lasting chord— Magic: The Gathering.
I’ve been playing Magic: The Gathering, or just Magic, over half of my life. To the uninitiated, Magic was the first game to blend traditional trading cards with gaming. Players cast spells and summon creatures to defeat their opponents, all represented on 2.5×3.5in cards. With over 10,000 different cards to play with and hundreds more created every year, the gameplay is as complex as it is deep. Entire books have been written about a single card and how to play well with it.
I’ve learned a lot playing Magic. I never expected to transfer those learnings to startup investing, but here we go. Three things Magic taught me about venture capital:
1—You’re expected to lose (even if it’s nice not to)
If you’re good at Magic, you might find yourself competing at the highest levels. These tournaments—large events with long sweeping tables of geeks in towering warehouses and conference halls—have hundreds of competitors. Each competitor is focused on one thing: reaching the Top Eight. Don’t win, be in the Top Eight players. There’s a reason for that.
Magic is a game with some elements of chance. You have a custom, shuffled deck of 60 cards. When the game starts, you pick up the top 7 cards from the pile, and at each turn you pick up one more. Because of this, and through no fault of your own, games often go completely wrong. Your opponent might have the perfect deck to beat yours, you might not have the right cards at the right time, or you may face the infamous mana screw. This is why most top players only have a win rate of 70% or so and why there’s only ever once been the same world champion two years in a row. You are expected to lose, so much so, that players don’t care if they win a tournament, they only care that they’re in the final eight players. Overall victory is practically a coin toss from that point onwards.
Venture investing is the same. As the adage goes: 90% of startups fail. As an investor, it would be great if none of your portfolio companies disappeared but, alas, some will. The win rate is not dissimilar to Magic, actually. The market shows that a good investor can expect 33% of their portfolio to be written off, which with some crude hand-waving we can take to mean a 67% win-rate. You are expected to lose.
2—The vanilla test
In my first ever Magic tournament, I had two of these fellas to build my deck with.
He’s called Arc-Slogger. In the top right, we can see he costs 5 magic (or mana) to summon. That’s two red mana and 3 of any colour (please just go with it). My eyes drifted to his special power: I can pay one red mana and trash the top ten cards from my pile to shoot someone with an electric shock. But 10 cards—this is a lot! In this particular game, I only had 40 in my deck. In Magic, if the number of cards in your pile reaches zero you automatically lose, so why would I want to remove 10 cards for some crummy lightning bolt? I’ll never use it. There’s no way he’s going in my deck.
What I didn’t take into account, however, was the vanilla test. If Arc-Slogger had no special powers at all, I would have been happy to play with him. 5 mana for a creature with 4 attack and 5 defence is just fine. You’re looking for a creature’s attack and defence to add up to about twice the amount of mana you pay for it, so that’s fine. Whack him in the deck. What it’s too easy to forget is his lightning powers are totally optional! I don’t have to use them! I could have just pretended he didn’t have them, saved myself the hassle and been happy. In other words, it doesn’t matter if the frills are bad as long as they’re optional and the core is strong.
That’s the vanilla test: the idea that if you strip away the optional extras, whatever remains should be solid. Arc-Slogger is a definite pass.
In startup pitches, it’s similarly easy to get distracted by the frills. Companies can get carried away, talking about all of the amazing side products and extra pieces that their tech might enable. After a while, you learn to sit down, calm down, and study the base case. Can fictional business Acme Corp scale by selling widgets to its target market? Forget all the extra bits; forget the 2045 vision of Acmeplex on the Moon. Is this a viable business at its base, or does it need to sell gadgets to France as well as widgets to Germany? Startups need to pass the vanilla test. When the frills are stripped away, is it a good business?
3—Two OKs don’t make a great
In Magic, there are good cards and bad cards. There’s no avoiding it. Some cards represent strong and powerful spells, others are little more than the What The Fluff Challenge. When constructing a deck of cards to play with, players are clearly far more likely to win if they fill it with the Indulgent Tormentor rather than the Chimney Imp.
One thing that can be enticing, though, is when cards combine in interesting ways. Sanguine Bond, for example, creates an infinite loop with Exquisite Blood. BUT, it can get a little TOO TEMPTING to play cards that aren’t great just to get synergy. Take Flamespeaker Adept. This is a fine card. It passes the Vanilla Test and the ability is good if you’re scrying a lot. Now take Rage of Purphoros: There’s no way this card should cost that much. It costs too much mana. But! It’s very tempting to play it just to scry and activate Flamespeaker Adept’s ability. You shouldn’t. It’s a bad card, but it’s tempting.
This is something a Magic player needs to learn not to do, and it’s something to think about when assessing startups. Often, a startup will do two or three things as part of their product. When evaluating these startups, VCs need to think: Is this actually just two mediocre businesses smashed together to try and look like a passable business? If anything that makes it worse! The effort required in making two mediocre products that synergize is more than making a single great product that is better than both combined. Not that there aren’t great startups that do two great synergistic things, but suffice it to say two OKs don’t make a great.
So there we go. From spell-slinging to deal-making, lessons from Magic: The Gathering applied to venture investing. Not something I ever thought I’d be writing, but in the words of Kanye West: “Everything in the world is exactly the same.”