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Why the MIT Blackjack Team Became Entrepreneurs 61

Posted by samzenpus
from the honest-work dept.
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."
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Why the MIT Blackjack Team Became Entrepreneurs

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  • by Anonymous Coward

    Because they knew how the game 'system; is rigged and decided to let some other idot do the work for them and just vulture off the profit

    • by gl4ss (559668)

      well it's actually a lot easier if you can start something like solidworks and profit from it than being a hedge fund manager..

  • I know why. (Score:3, Interesting)

    by Anonymous Coward on Friday June 28, 2013 @08:21AM (#44131117)

    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.

    • by khallow (566160)
      I think it might be because the hedge fund market is already crowded. They'd end up working for someone else.
    • by Darinbob (1142669)

      Maybe they just wanted to do something interesting? But starting a startup doesn't sound interesting either, probably every bit as big of blowhards as hedge fund managers. People need to stop worshipping entrepreneurs and realize that they're just gamblers with bigger stakes.

      On the other hand, while hedge funds may do worse than the market over the long term, hedge fund managers do far better than the average wage earner.

  • by MarvinMouse (323641) on Friday June 28, 2013 @08:28AM (#44131151) Homepage Journal

    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.

    • by SirGarlon (845873) on Friday June 28, 2013 @08:38AM (#44131189)
      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.
      • by CastrTroy (595695)
        What's really high risk about starting your own company? Especially when you aren't taking out any loans to do it. The way they played blackjack, they basically removed all the risk, by coming up with a system to beat the house. 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. If you can develop a well needed product, the payout is immense. If it turns out not to be as successful as you thought, you can probably still
        • by SirGarlon (845873) on Friday June 28, 2013 @09:09AM (#44131395)

          Apologies for drifting off-topic, but my perception of risk is very different from yours.

          All you stand to lose is the money you paid yourself while developing the software for a year or two.

          You stand to lose a good deal more than that. You stand to lose:

          1. The salary you paid yourself and your staff
          2. All the overhead expenses, such as your lease on office space, insurance, the computers you develop software on, and all the professional services you'll need: accounting, legal consultation, etc.
          3. The salary you are NOT EARNING while throwing your money into a failing pit
          4. The dividends you are NOT EARNING from your initial capital, which could be making money in a safer investment instead of losing money

          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.

        • by tlambert (566799) on Friday June 28, 2013 @09:23AM (#44131489)

          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.

        • by khallow (566160)

          The way they played blackjack, they basically removed all the risk, by coming up with a system to beat the house./quote> Coming up with that system wasn't zero cost. If the casinos had caught on quicker, they'd be out the cost of that time and plane tickets. And maybe they'd have run afoul (in a painful sort of way) of some mob types.

        • Plenty of risk (Score:5, Insightful)

          by sjbe (173966) on Friday June 28, 2013 @10:19AM (#44132015)

          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.

          • by Darinbob (1142669)

            I've notice this in the past. The techie who becomes CEO does a lot worse for the company than if some sales asshole is hired to run the thing instead.

            • The techie who becomes CEO does a lot worse for the company than if some sales asshole is hired to run the thing instead.

              That's because THE primary job of the CEO is sales. Sure the CEO is responsible for the whole company, engineering included, but the CEO is the most prominent public facing person in the company (usually) and as such they necessarily have to focus much of their time on outward facing issues. Sales and financing are the two biggies here. There is a reason a lot of companies have a COO to focus on the inward facing operations. CEOs involvement in operations tends to be more big picture (there are exceptio

        • by aaarrrgggh (9205) on Friday June 28, 2013 @11:34AM (#44132755)

          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.

        • by Darinbob (1142669)

          Starting a business is hard. It's an amazing amount of hard work compared to just being a wage earner. And the vast majority of new businesses FAIL. Good ideas fail and bad ideas succeed, there's no logic to it. Entrepreneurs are essentially extreme risk takers. If you don't have the money to start the business then taking out extra mortgages to make your family poor is immoral. If you are comfortably well off then there's no point in starting a new business. So what really happens is that the extre

    • by hrvatska (790627)
      They did what they knew. They knew tech so they went into tech. If they had come out of the Harvard business school they would have been much more likely to have started ventures that were in finance and investment.
    • They made enough off of their BJ work

      Knew a girl who did that.

    • by Anonymous Coward

      This.

      Same is true of any industry. Look at the music industry, for example... when they ask those that made it, the answer invariably is something like "I don't know why me and not the other guy." But its so simple. You get out what you put in... enterprise is a machine, if you have the money to make it go, go it will, regardless of the viability of the product. When you market something, there is always some predictable return on the investment. Anything, anything at all can be marketed, advertised, sold a

    • by kilgortrout (674919) on Friday June 28, 2013 @10:32AM (#44132135)
      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.
      • 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 manage

  • business conditions for the Mafia must have made them consider a career change to an occupation that was protected rather than prohibited by govt.
  • Why did they do that instead of becoming, say, hedge fund managers?

    Because, even when they had some money, they still had at least a spark of humanity left within them? Being human and being a vulture capitalist just don't mix.

    • by Darinbob (1142669)

      Not sure why hedge fund managers get the bad rap. The whole idea of hedge funds is to protect investments, and they're definitely looked down on by more mainstream fund managers. Some people point to them claiming that hedge fund managers saw the economic downturn and profited off of it instead of warning people; but no, they did warn people, they warned people not to put all their funds in one place but should instead diversify, and other more direct warnings about the mortgage market which were ignored.

  • I do a decent amount of gambling myself. You generally need to do some explicit calculations to evaluate whether your bankroll is large enough for a given risk. Most people just go on intuition when evaluating risk while a gambler is pretty much forced to do the math. (Also deals with simple enough systems that the math is easy) This, along with the money they had, gave the MIT team a very good background for going into business.
  • by 140Mandak262Jamuna (970587) on Friday June 28, 2013 @09:03AM (#44131359) Journal
    Managers of large hedge funds are basically lottery winners. All small hedge funds take outsize risk, and most of them see their investments go bad and they go under. By definition, and by sheer probability, some of them must win. Because of the extreme distribution, the survivors are huge lottery winners. But unlike lottery winners who knew they won by luck, these winners think they won because of their skill. And they also create a huge environmental niche for flatterers, hangers on, side kicks whose pay check depends on stroking the egos of these Gordon Geckos. And the media also play along make too much out of them. The MIT guys knew the market is even more chaotic and even more unpredictable than roulette wheels. So they wisely stayed away from this.

    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?

    • by istartedi (132515)

      why do companies that go under the market, get bought by private equity and then come back into the market and get valued highly?

      Because all companies hit rough spots, and when a company looks vulnerable PE vultures will do anything they can to put their talons in. This might include back room deals for another investing house to short the stock and make it look bad. Another tactic would be to seat board members who will make "poor decisions" in running the company while preserving what the vultures wan

      • The fundamental premise of the free market system is, somehow the invisible hand of the market will make these scumbags pay and in the long run the market will reward the non-scumbag wall streeters. But that is theory. In practice, such free market systems work only for very simple commerce where the cost benefit analysis is easy to do, and people make rational choices between value and price, and there are many sellers and many buyers all acting without collusion. So we both should agree that blindly trump
    • No doubt some of them are lucky but to say that all of them are lottery winners is silly. See Ed Thorp, Jim Simons or Warren Buffet.
      • Warren Buffett is not a hedge fund manager. He is an investment company manager and one of Cassandras railing against the hedge funds. He has bet that plain and simple S&P500 index fund can beat hedge funds and is winning it five years into the bet. Read about him.
        • I'm citing Warren B as evidence that people (some, and not by luck) can beat the market consistently. You haven't refuted my point though.
  • 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.
  • Yes, and also the T in MIT stands for "technology".
  • At least three of them wrote books on the subject.
    -MIT sudent here
  • The 2012 survey, the most recent from the MIT career office, has 25% of SB grads entering finance, investment banking or consulting. During boom years the total has been higher.
    I assume its a combination of high pay and being able to stay in the northeast. The finacne companies want poeple smart in both science and computers.
    • The 2012 survey, the most recent from the MIT career office, has 25% of SB grads entering finance, investment banking or consulting

      Not exactly shocking. That is roughly the percentage of the student body that is enrolled in MIT's Sloan School of Management (their business school). 819 / 3389 graduates = 24.16% [mit.edu]. One would expect most of them to do something in the world of finance.

  • by slew (2918) on Friday June 28, 2013 @01:46PM (#44134871)

    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.

There's no such thing as a free lunch. -- Milton Friendman

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