Sometimes It Is Just Luck-But You Still Have to Take Risk

When people tell me I am “lucky” I get a bit offended.  I took a lot of personal risk and continue to take a lot of risk.   I worked super hard and put in long hours.  I did stuff few other people would have done at the time.  Who runs orders to a pit and takes the abuse that comes with it, with a business degree from college for three months, no insurance for $150/wk gross?  No one handed me a money tree or a success tree.  Throughout various parts of my life, I have assumed risk.  Especially in my 20’s-50’s.  Outsize stupid risk on some occasions.

To tell you the truth, since 2009 it has been a total grind for me.  I have had a few ups but mostly downs and battled a lot of demons internal and external.  Some people took advantage and were shitty.  I would have never treated someone like some others treated me, but I suppose that’s because on the trading floor you never did stuff like that.  It’s different in the real world where people are often a bit nefarious, as well as companies.

In 2015, I almost quit.  It was November.  I was ready to move to Florida and cobble together a life through the next several years to retirement.

I was fortunate to meet my partner Kenny and would not be doing what I am doing without him.  But, to meet him I networked pretty hard and a random interaction happened.  So, there was some luck, but you cannot get lucky unless you are willing to assume some risk.

People say we were lucky starting Hyde Park Angels, especially when we did. Except, all of us chose to go to business school at Chicago Booth.  We took some risk and paid an opportunity cost along with the cost of going. All of us chose to undertake starting something from the ground up that revolutionized seed financing in the Midwest willingly for no pay at all.  We took reputational risk.  We persuaded and negotiated with Booth to get it done.  They were reticent. Some of us put our money at risk and made sure it was successful by doing what it took to make it successful.  It wasn’t luck, it was really hard work.

I have heard investors say they were lucky.  It’s a variable word with a lot of different meanings to different people.

When I was trading, I knew when I got lucky.  Sometimes it’s hard to separate skill and luck.  For example, one time I made a trade with a guy.  I thought I had bought some spreads when in fact, I had bought some outright contracts.  I left the floor, took a nap, and a trade checker paged me (yes back in the day we wore pagers).  She checked the trade and I realized we had an out trade.  I checked the market and I was up quite a bit of money.  Now that’s luck.  If it had been the other way around, I would have been eating the entire loss.  That would have been bad luck.  Of course, even if I had bought spreads and there was no out trade, I would be assuming risk that I didn’t have to assume.

In startups, sometimes luck has a role but generally it’s all about the execution of the team.  They find ways to win.  They manufacture their own luck.  But, just doing a startup is risky.  Many founders could go work for a big consulting firm or corporation.  They also could get by doing a mom and pop business.

Except, every once in awhile you do get truly lucky.  That happened to me this week.

The first investment that Hyde Park Angels did was in a card shuffler when we started in April of 2007.  I am not even sure if it’s on the website anymore since they have scrubbed the website of all the co-founders names.  We wanted to come out of the gate with an investment and back our words with deeds.  We didn’t want to be “all hat and no cattle.”  There is so much bullshit in the startup world and we didn’t want to be like that.

Hiro Toyama was behind Shuffletech.  One of our co-founders, Rick Schultz, was going to become the CEO of the company and Rick, Ryan and I were going to fund it.  Hiro played a lot of poker at home and it was a pain in the butt to keep cards shuffled all the time.  It was really slowing down games.  If you recall, poker was huge back in 2007.

At the time, all the existing card shufflers were pretty bad.  The only good ones were at casinos, and they cost thousands and thousands of dollars.  You could buy a rehabbed one on eBay.

We formed a our first LLC and invested into Shuffletech.  It was a good seed round at a fair valuation.  There were three dues paying HPA members in the LLC, Rick, Ryan and I.

The company had the usual startup hiccups. It never went anywhere and  I figured my entire investment was gone.  It was a sunk cost and part of the risky world of startups.

On August 7th, the game changed.  I got a little lucky.  Here is the press release from Law 360. (behind a paywall)

An Illinois federal judge tripled a jury’s $105 million award to $315 million Tuesday afternoon,following the panel’s verdict for ShuffleTech LLC and three other companies who accused Scientific Games Corp. ($SGMS) of initiating sham litigation to assert invalid patents and keep its automatic card-shuffler competition out of the market.

The jury’s verdict caps off a 10-day trial in Shuffle Tech’s 2014 antitrust lawsuit, which stems from patent-infringement litigation Scientific Games had filed in a Nevada court against DigiDeal Corp., Aces Up Gaming Inc. and Poydras-Talrick Holdings LLC, all of whom Shuffle Tech worked with in 2012 to launch its first automatic card-shuffler.

The verdict awards $45 million to ShuffleTech, $25 million to Poydras, $15 million to Aces Up and $20 million to DigiDeal, which assigned its rights in the suit to ShuffleTech.

U.S.District Judge Matthew Kennelly tripled those damages shortly after announcing the verdict in open court, and Scientific Games must file any post-trial motions by Sept.5 to challenge the case’s outcome.

The underlying issues date back to 2012, when Shuffle Tech began collaborating with gambling equipment manufacturer DigiDeal on a new card-shuffling machine that Shuffle Tech planned to market to casino operators,according to Shuffle Tech’s lawsuit. DigiDeal would manufacture the products and pay Shuffle Tech a royalty to use its technology and patents, according to the deal described in the company’s complaint

Shortly after the new device debuted at an expo in Las Vegas, SHFL Entertainment Inc. — a card-shufflermaker that Scientific Games purchased in 2013— filed a patent infringement suit against DigiDeal that Shuffle Tech says was based on patents Scientific Games knew were unenforceable.

ShuffleTech had planned to make and sell 800 shufflers during their first year on the market end 1,200 every year after, with a nearly $7,500 profit on each shuffler, ShuffleTech’s lawyer Joseph Presta of Nixon Vanderhye PC claimed during trial.

But litigating Scientific Games’ patent case ate up most of the initial $1 million investment Shuffle Tech obtained for its machines, and DigiDeal eventually filed a stay in the matter in which it agreed to stop making and selling its card shuffler.

With no money left, ShuffleTech had to quit making the machines and sell its intellectual property, essentially robbed of its chance to enter and compete in the automatic-shuffler market, Presta claimed.

ShuffleTech’s suit alleged its competitor secured the two patents asserted in Nevada by hiding prior card-shuffler art from the U.S.Patent and Trademark Office that the company says would have proved them invalid and unenforceable.

Rebuffing that contention, ScientificGames had argued the prior art at issue was disclosed to the USPTO in other applications, but it had been left out of the patents asserted in Nevada because it wasn’t material to the claimed invention. The USPTO knew about ShuffleTech’s lawsuit as well as Scientific Games’ belief that the prior art didn’t matter to the underlying patents, but the office has continued to issue new patents to Scientific Games, Craig Martin of Jenner &Block LLP, who represents Scientific, claimed during trial.

Judge Kennelly cleared the parties’ path to trial in September when he denied Scientific Games’ bid for summary judgment over ShuffleTech’s claim.  Settlement talks between the parties ensued but ultimately failed in April.

Presta told Law360 on Tuesday that he and his clients are pleased with the result of what was a “very complicated and long case and a very difficult case to prove.”

“But we were able to show that my guys came up with some really great technology and that this market has been monopolized, and now we know the truth,” Presta said.

Counsel for Scientific Games declined to comment Tuesday.

Here is the Shuffletech press release:

Shuffle Tech International, Inc. and its partners, Aces Up Gaming, Inc., and Poydras-Talrick Holdings, LLC, obtained a jury verdict today in the United States District Court for the Northern District of Illinois resulting in a $315 million judgment against Scientific Games Corporation. 

This antitrust suit was the result of a patent infringement lawsuit that Shuffle Master, Inc., a predecessor of Scientific Games, filed against Shuffle Tech’s former patent licensee, DigiDeal Corporation, nearly six years ago in October 2012 in the United States District Court in Nevada.  The Chicago jury found the Nevada lawsuit meritless and part of a larger scheme to maintain Shuffler Master’s 100% monopoly of the U.S market for automatic card shufflers used in casinos.

The jury awarded damages totaling $105 million, which have been trebled by statute to $315 million. According to Rick Schultz, the CEO of Shuffle Tech, “this is an important victory not only for the plaintiffs, but also because it should send a strong message to all companies and the law firms that represent them that abusing the patent system or the courts to drive legitimate competitors out of business carries a high risk.” 

So, was it luck?  To a very large extent for me it was.  I had zero insight or control.  I was 100% passive.  But, as they say you invest in “good teams” at seed.  I risked my own capital and so did Ryan and so did Rick. Startups that go through what Shuffletech went through almost always fail.  Usually it’s the other way around with patent trolls attacking startups on behalf of big corporations that are trying to stifle competition.

Rick took a huge outsize personal risk.  He graduated with honors from the top MBA program in the country.  He could have done a lot of different things.  He took the helm of a seed stage startup after meeting Hiro and believing they could do it.  Then, when things went bad, he found the only way to win that was possible.  He invested a large amount of personal money to make it happen and he persuaded others to finance it.  They all assumed a lot of risk too.

The moral of the story is as an investor, you always always always have to invest in good teams that have the intestinal fortitude and insane stubbornness it takes to win.  The second moral is you have to take risk.  Big upsides are not ever a sure thing.  They only look like it in the rear view mirror.  The third moral is to never give up.  Never ever give up until the company has folded.  I certainly didn’t adhere to the third one when it came to Shuffletech and I was wrong.   I took risk, and I got lucky.

At the Naval Academy, they have a saying.  It rings true in startups too.  I won’t be giving up any ships again.

If Hiro reads this, I guess we have to back him on his toilet seat idea now.  (Inside joke)