The Short Stack Advantage January 29th, 2013.

In the early days of Dropbox, we spent a whole lot of time coding and not very much time thinking about business strategy. So whenever anyone asked me how worried we were about competiting with the myriad well-funded companies in our space, I mostly just shrugged the question off. Paul Graham recommends worrying about product, not competitors. Our strategy, if we had one at all, was simply to build a killer product, and let it speak for itself in the market.

My social outlet at the time was a fortnightly poker game, where I met a bunch of startuppy poker players and got some not-so-cheap experience in decision making under uncertainty along the way. Because a night of Texas Hold 'em can comprise hundreds of hands, I learned a bunch of lessons empirically that I otherwise would've had to take on faith. Most of those lessons were pretty poker specific, but they often helped me reflect on real-life decision making as well.

At the poker table, I was often the short stack (that is, with very few chips relative to others). Consequently, I got a lot of practice with the short stack strategy: If you have very good cards, bet all of your money; otherwise, just fold. In no-limit hold'em, a game with four betting opportunities every hand and nearly no restriction on what you can wager, this strategy is extremely simple. It's also quite profitable if done well. And it's effective for many of the same reasons that Dropbox's single minded strategy was.

Simple is good

Startups are naturally short stacks. They show up at the table with dreams of success, but far fewer resources to work with than the folks who have been sitting there building their stacks over time. Ordinarily, you'd like to be one of the big stacks, for obvious reasons. But in situations with tremendous uncertainty and high-volatility payoffs, having more options is not necessarily better. Do you fold, call, raise, check-raise, or check-fold your opponent, and if you invest that much in this hand and lose, are you crippled for later hands? And the same paralysis-by-analysis happens in the startup world.

Case in point, we would occasionally peek our heads up and inquire about a Dropbox competitor, like the long-rumored Google Drive. To this day I don't know what actually happened internally at Google, but the rumors we heard were all variations on the same theme. Google had too many choices to make about what the product meant to the company. Are files dead? Can a web company make a desktop app? Isn't backup a commodity business? The product completely stalled in the face of so many choices. Meanwhile, we just kept coding. I don't know how many versions of Drive got built, but I heard about it in 2006 when I was interning at Google, and it didn't launch to the public until 2012. In the meantime, Dropbox was founded, launched, and picked up millions of users.

At any point, Google might've launched Drive and totally eaten our lunch. After all, they were and still are an engineering powerhouse. The only things that really save a startup going up againt a behemoth who sorta has a similar idea are speed and focus. Though I'd like to claim the early team was insanely focused just by our nature, the truth is that it was relatively easy for us because the short stack strategy is inherently self-enforcing.

Unlike Google, we only had one idea about what we might want to build. Even if we'd wanted to pursue other ideas, we didn't have enough money in the bank to finance experiments. With more resources, we might have stepped back to consider other possibilities, and that likely would've been a fatal mistake. Instead, we wore our scrappiness as a badge of honor, and just cranked out code until we built something great.

Too rich to afford it

The short stack strategy succeeds in poker primarily because you avoid spending any money until you invest heavily in what's very likely to be the best hand. But you'll also pick up small pots along the way to your big win (or loss) because the strategy creates what poker players call fold equity. Fold equity is a fancy term for the money you'll win if you convince your opponents to fold.

The fold equity comes from the fact that you and your better-funded opponents have drastically different utility curves. To you, anything you can win is a major victory. Startups mostly fail, so if you can establish a beachhead in some niche, that's way better than nothing. On the other hand, big companies could care less about niche plays, so they're willing to cede small but heavily contested turf. Unfortunately for the big company, that turf might just be the first of many losses. IBM probably should not have been so generous to Microsoft.

The other side of the fold equity here is the relative sensitivity to downside. That is, big companies are afraid of looking dumb. Startups pay very little cost in screwing up, because the world never expected much of them anyway. But when a big company invests in something that doesn't pan out, they end up taking their lumps with investors who wonder why they didn't stick with whatever was working.


The short stack strategy generally comes to an end pretty quickly. There are only so many times you can risk everything before you end up winning big or losing it all. There's no sure thing in poker—even Aces—and there are definitely no guarantees with startups.

In practice, the short stack strategy succeeds in poker somewhere around half the time, while startups fail far more often than not. On the other hand, the consequences of startup failure are less severe than those of poker; it hurts a lot less when you're not playing with your own money. And as long you make the best of the money you're given, investors are likely to fund your next venture. Still, losing's no fun.

Luckily, Dropbox's outcome as short stack turned out extremely well. At some point we realized that we were no longer the scrappy company we started as. Popularity brings resources of all sorts, and those resources mean that the company is now poised to take on even greater challenges. Being the big stack has obvious benefits. Maybe the only downside is that looking back, your past successes feel a lot less awesome compared to the huge success you're now shooting to become.

If, like me, you're happy just winning more than you'd be happy winning big, better is to simply pick up your chips while you're well in the black. I was super jazzed to stick around and be a part of Dropbox's journey from world-renowned to world-dominating. At the same time, I missed the thrill of being the underdog and the excitement that comes from knowing that you're working on something that can still grow a thousand times over. So I stepped away last year to pursue new opportunities.

Now I'm just waiting for my all-in hand.