The Parlay

In gambling, particularly in sports, there’s a concept of “parlay.” The word can be used as a verb (“turn an initial stake or winnings from a previous bet into (a greater amount) by gambling”) or a noun (“a cumulative series of bets in which winnings accruing from each transaction are used as a stake for a further bet”). The more I discover about going beyond just writing checks into startups — concepts like portfolio construction, cross-fund management, and new fund formation — the more I realize how critical the parlay is.

Let’s focus on the noun first. In the NFL, for instance, you can make a series of connected bets that, if you’re right, can hit the parlay — the more games in the parlay, the bigger the payout. Picking the right 5 or 6 lottery numbers that show up on TV is a form of a parlay, albeit a random one.

Then there’s the verb, “to parlay.” I’m much more interested in this. “To parlay” something, as stated above formally, is the process of using earlier winnings to gamble — or, to invest — in the future. And naturally, I started to see patterns in the startup ecosystem. A savvy operator at a breakout technology company may parlay his/her early pick (in the form of stock, cash, or reputation) to an executive title in the next role, or a plush investment job; a daring creator may parlay a government grant into a product that works magically, and then parlay that into a company. There are so many examples of folks doing the parlay – accumulating resources, harnessing them, and exhibiting a willingness to forgo time and those early wins for a bigger prize. Recall, the odds of a parlay lower as more connected bets in the chain have to hit.

Naturally, I started thinking about the parlay as it relates to startup investing, building funds, and fund management. There are now many angels who have parlayed their early portfolios into VC funds (big and small), or taken that portfolio and turned it to a GP role at an established VC fund. Today, with more scout funds, syndicates, and newer funds forming weekly, those folks have parlayed whatever they’ve done before to get the chance to put money to work for others.

But, the parlay doesn’t stop there. This is just the beginning. What I’m finding as the Haystack funds slowly accumulate, the parlays required do, as well. As a fund manager and part of the GP, the GPs have to make a “GP commit” to show skin in the game. Most GPs can’t actually make that commitment, especially younger ones, so either the firm or a bank will loan or finance those commitments against future cash flows. Of course, if the fund does well, that investment compounds nicely. There are other parlays. A firm that writes lots of initial checks may have a strategy to concentrate their money in just a few of those companies after turning over a few cards. A new fund manager may have to engineer a secondary in a great company from a prior portfolio, convert some of that holding to cash, and use that cash as a show of good faith in a GP commit; he or she may elect to roll up previous good investments into a new vehicle to sweeten the pot for other LPs to come in and feel as if the first moves out of the gate are positive.

What threads this all together is the universal concept of taking risks. People undertake all sorts of personal and financial (and time) risks to get to the place they want to be. Yet, as people age and time gets more finite, the parlay is attractive — stringing bets together, we all have to concentrate our risks a bit and make decisions ahead of when we would like, ahead of when we have full information. The upside of the parlay is that it is a multivariate play, it is a shortcut to get to the next level — with plenty of risk baked in, and that’s the point.