Backing and Bad Deals

Although I’ve occasionally sold action, I’ve never had a long-term backing deal, and I’ve never wanted one. I have a few horses but I’m generally very reluctant to stake anyone else. My thinking on this is as follows:

To the extent that the backer has an edge on a deal, it comes at the expense of the horse, ie the backer’s share of the profits is money that would otherwise belong to the horse were he playing for himself. Of course the horse derives other advantages from this, namely greatly reduced risk and bankroll requirements. These can certainly be mutually beneficial arrangements, but there is a narrow margin in which the backer is appropriately compensated for his risk and the horse is giving up not too much of his profit.

The catch is that, in most cases, there is also an invisible “trust tax” cutting into one or both sides of the deal. Anyone who reads Two Plus Two knows the kinds of things that happen: horses conceal winnings, play games they aren’t supposed to play, sell more than 100% of themselves, etc. Those are all examples of dishonesty but problems can arise without any bad intention as well: misunderstandings about the terms of the agreement, burnout, a sudden loss of bankroll, etc. No matter how well you know someone, but especially when dealing with relative strangers, you have to factor a substantial risk of something going wrong, intentionally or not.

Because neither party can fully trust the other, both must make some allowance in their edge for the possibility of problems arising. When dealing with narrow margins, this additional risk can theoretically turn a backing arrangement into a bad deal for both sides. This is why I’m very particular about my horses and only enter deals with people who have established reputations and “trust taxes” that are about as low as I can make them.

I’m going to include here some recent correspondence with a reader, slightly edited for clarity and anonymity. I believe his story illustrates my point quite well:

Hello Andrew,

I am 24 years old and I live in Henderson, NV. Following the shut down of service to US players on Pokerstars I decided to play a few live tournaments.  I instantly final tabled two Bellagio WPT $540’s back to back.  During one of those deep runs I was offered, by another player in the tournament, to join his team of players that are backed.  I had made out plans and set out a schedule of tournaments over the course of the summer only to find out that the backer of their team just went on $400k downswing and they are not adding any new players.
Now I am stuck in a bad spot, I am scrambling to find any sort of staking/coaching deal for the summer and I do not know anyone in the poker world.  I am a very intelligent player, and I work very hard at poker.  I have results to prove that I am a profitable player to stake and I will always play until all make up is recovered.  My back up plan to playing live here in vegas is to move out of the country and continue grinding for Supernova Elite.  I would be willing to grind online for bonuses to recover any makeup if needed.  It’s an absolute freeroll for anyone willing to back me.  I have no idea if you even do this sort of thing, but if not perhaps you know someone who does and could put us in contact.  If you or anyone you know might be interested at all please let me know and I will send you a resume of my accomplishments in poker and tell you more about myself as a player.  Any help you could offer, even if just some words of advice, would be greatly appreciated.
My response:
Sounds like a shitty situation, and I wish there were something more helpful or reassuring that I could tell you. What happened to you is a good example of why I’ve always avoided entering into relationships like these with relative strangers. There are just too many ways for someone to screw you, intentionally or unintentionally. If you have other options, I would actually encourage you not to rush into another backing arrangement with someone you don’t know well and trust.

Leaving one of the gambling capitals of the world to play poker seems a bit silly as well. I’d say just play what you can afford on your own bankroll. Stay away from the high rakes on small stakes tournaments and grind up your roll at 1/2 and 2/5 NLHE games or whatever. Keep an eye out for tournaments that are a part of a series like the Venetian deep stack that provide a better structure or rake for smaller buy-ins.

He wrote back two days later:
Hey Andrew, thanks for getting back to me. I decided to just forget about finding a stake and grind the small Venetians.  And wouldn’t you know it I insta make a final table in event #1.  If I can finish top three it will be worth more than the stake that I was supposed to have anyways 🙂   Looks like I’ll be alright for the summer.
The final table didn’t go as well as he hoped, but it looks like he’s going to be alright:
Hey Andrew, I finished 9th at that final table, I lost AK v K2 for a 2nd place stack.  I followed that up with an 11th place finish in the next VDS that I played.  That one was rough I was chip leader with 15 left and bluffed away my chips.  A few days after that I got 2nd in a daily $235 tournament at the Rio for a nice little score of almost 14k, I got 3 outted heads up, 1st was 22k.  No luck in any of the WSOP events yet,  but I really like my chances in the shootout event tomorrow.
In my experience, a lot of players, younger ones especially, are way too eager to jump into staking arrangements. Even if it is +EV for you in the short term, enabling you to play stakes several times larger than you could otherwise afford, it may not ultimately be the best thing for you. At the very least you should use it as a stepping stone, saving your share of the profits and setting a clear goal for when you will strike out on your own money. Do you really want to be someone else’s indentured servant for the rest of your poker career?

18 thoughts on “Backing and Bad Deals”

  1. Not that people have exactly lined up to back me, but I’ve had a few offers over the years, and the first question I’ve always asked is, “Define standard deviation.” If they can’t, that’s the end of discussion. I don’t want to deal with a backer who doesn’t understand even the most basic math of risk.

    IME, most backers have even more stars in their eyes than most players who look for backing deals. They think you’re their winning lottery ticket. Everyone is hoping to hit bingo and no one realizes how lucky you have to be for that to happen.

    • I think you’re right about that, and I like that question a lot. When I was selling Madrid action, I had a non-poker friend who wanted to buy 10%. We had a long conversation before I agreed, because I knew that all he knew about me poker-wise was my WSOP results and was afraid he was expecting to print money. He used to work for an investment house, though, so he knew what questions to ask and after a while I was convinced that he’d done due diligence and understood what he was getting into.

  2. I don’t get why people have such romantic conceptions of backing. Backing, just like poker, is a long-term game, because it’s based on poker. Poker is a long-term game because there is an enormous luck factor. No need to even understand standard deviation or variance. Focusing on short term in poker is just gambling.

    In theory, getting backed should make exactly zero difference (to you as a horse) in terms of the money you win. Yes, you can play higher stakes, but if the deal is fair, you also give up a proportionate amount of your winnings. If you play a $5k even but you’ve sold 80% of yourself, it’s equivalent to playing a $1k. No difference in terms of potential winnings.

    So what is the purpose of backing?

    The backer earns his horse’s ROI, in the long run. That’s it, no more, no less. You stake a player for $500, and that player has a 100% ROI, you will earn $500 profit. In the long term. Anyone who looks at backing and poker and thinks short-term insta-win is an idiot. But 100% ROI, or even 50%, long term, is a very good rate of return for any passive investment, even with some trust risk. You don’t carry any of the ancillary costs – travel, accommodation, meals, hours at the table – but you earn the same ROI as the person who does. Some astute Russians on 2+2 seem to have figured that out and refined into a science. The biggest risk is that you misjudge your horse’s long-term ROI.

    The horse, on the other hand, doesn’t win anything directly from playing higher stakes. As mentioned already you are only playing the stake that you are actually buying into yourself. What the horse gets is the chance at that big score that gets you “noticed”, the chance to get lucky in the short term, the chance to meet and greet the poker elite (whoever that is) and/or the poker media, etc.

    So I guess I don’t understand how being backed makes you a servant, or how it is anything but win-win – assuming you are a winner at the stakes you intend to play.

    • You’re assuming a deal with no mark-up or profit share on the portion of the buyin paid by the backer. In your example most horses would (rightfully) charge you something for the privilege of buying 80% of their action. That’s where the math gets complicated, because you no longer earn their ROI.

      Also, if you want it to be a passive investment, you better have damn trustworthy horses. My understanding is that some of the more successful backers spend an inordinate amount of time making sure they aren’t getting ripped off and that horses don’t blow winnings in the pit before paying them their share. I’m not saying they don’t make good money, but they do work for it.

      In the case of online grinders getting into major land-based events, your argument about having a shot at prestige makes sense. It doesn’t surprise me that staking proven online grinders in live 10K’s is so popular. What surprises me is that so many people are backed to play $20 MTT’s.

      • You’re right of course – you have to subtract the percentage markup as well as any trust tax as a backer. Your backing success, long-term, as long as your sample size is big enough, comes down to how well you estimate your horses’ net ROI including those factors. If you just back some randoms occasionally, though, your variance will be through the roof. Same as sample size in poker.

        What makes no sense to me is the “servitude” argument that many people seem to make. The backer isn’t taking anything that the horse would have otherwise had. Sure you can take a shot yourself, and there are arguments for doing that sometimes, but more than likely playing above your bankroll all the time will get you broke. As for $20 MTTS, you have to start somewhere… getting backed in $20 MTTs lets you grow your graph at that stake, and get staked higher, or give you confidence to take a shot yourself, whatever, all faster than waiting for your own bankroll to catch up. I still see only win-win.

    • In addition to what AB says, you can’t assume that selling 80% of yourself in a 5K is the same as selling 0% of yourself in a 1K. If all else were equal it would be, but all else is never equal. For that matter, pretty much nothing else is ever equal.

      • In terms of your potential winnings or losings? Why not?
        My point was that the horse gets the other benefits of higher stakes – exposure, etc etc – without having to have the bankroll, and the backer gets the horses net ROI and that it’s win-win.

        • I’d argue that horses often give up more than just their share of winnings that they couldn’t afford anyway. Backers generally have the right to tell you what you can and can’t play and sometimes to mandate a certain amount of volume. I’ve even seen deals with fixed periods such that the horse doesn’t have the right to quit any time he’s in the black. That’s the kind of stuff I have in mind when I talk about indentured servitude. As Lin Sherman points out, you could at the very least be in for a lot of grief from a backer who can’t handle swings and starts putting pressure on you when you are in the red.

          I don’t dispute that backing can be mutually advantageous, and in fact I’ve been involved in such deals myself. But I think a lot of inexperienced players are eager to play higher stakes and end up giving away not just money but control over the course of their careers as a result.

          • That’s a good point – there are transactions costs in terms of trust tax on one side, and there can be restrictions and provisos on the other.

            I would still argue that these are not essential features of “backing” but rather start to verge into the realm of employment (or servant..) contracts. Not really the same thing.

            To my knowledge, the way the Russians on 2+2 approach backing is they don’t tell you what or how to play. They ask for your graph, estimate your net ROI, tell you you have to have at least $x of yourself in the event to ensure some level of responsibility, and then let you go nuts. And shoot you if you don’t pay. (ok I’m not sure about that last part)

          • In defense of backers…if the horse could just walk away from a multi-tournament deal any time he’s ahead, it’s a freeroll for the horse.

            • I think this is standard in most long-term backing arrangements. Why does the horse owe anything to the backer when they are in the black? If profits are small then presumably horse has the same need for backing that he had when they started the deal. If profits are large, then backer should already be happy about the outcome of the deal. I don’t see how a horse could take advantage of a backer as a result of this.

          • Unless there’s no markup, the horse always has a freeroll with the portion of the buyin the backer puts up. E.g. if we both put up $100 but I (the horse) get 60% of the net, then I’m freerolling for 10% of our net.

            I’m also transferring a corresponding amount of my risk to you. The math gets complicated, so just take my word for it.

            That’s not necessarily a bad deal for the backer, but it’s definitely a great deal for the horse. And it applies whether there’s a “make-up” clause or not.

            It’s a bad deal for the backer if there’s insufficient “risk insurance” built into the deal. There’s always some chance that, for any number of reasons that shouldn’t be hard to imagine, the backer will never recoup his investment in any given horse, even if he has a makeup deal. Somehow the backer needs to assess that risk and make sure he’s covered on the upside.

            The potential problem with simply allowing a player to quit when the team is ahead even a small amount is that if all your horses keep doing this, you may have nowhere near enough upside to cover your potential losses. Depending on how good and reliable the horse is, letting him quit when you’re a little ahead may indeed be acceptable, but I suspect for the great majority of tournament grinders you’d want to build some kind of “risk insurance” into the deal. There are various ways to do that, which I won’t go into here because I’ve prattled on long enough.

            The point is, a simple make-up clause may be adequate, or it might not, to give you sufficient risk insurance. But because of the freeroll, it’s always a better deal for the horse than the backer.

          • Just to be clear, I’m only talking about freerolling the money and risk. Obviously the player is contributing labor which has some value. Basically, his markup is what he’s getting paid to play. There’s obvious utility in this for the backer, so there’s more to this than just who gets what share of what. However, the utility of having someone play for him does not offset his actual financial risk in any way, so the backer still needs to have some kind of “risk premium” built into the deal.

        • In the real world, you’re not going to find any 1K event with the same field size, starting chips, prize schedule, blind schedule, players/table, dealers and floor people (who affect the speed of play) and quality of opposition as any 5K event. Your earn-per-hour is just never going to be the same.

          I’m not saying the 5K is always worse, but often it will be.

          Furthermore, even if you do find two tournaments that offer exactly the same earn-per-hour (after adjusting for your backer’s shares) it doesn’t make any sense to play the one where you need the backer. Play the 1K on your own dime and you don’t have to worry about pissing off your backer if you bust out.

  3. Note also that the duration of a backing arrangement (and the terms for its termination) have a very big impact on the proposition for both sides.

    Putting it into terms that your investment banker friend would appreciate: a backing arrangement for a tournament or a tournament series is similar to buying (or, as the horse, selling) a call option with a near dated expiry. The “markup” is analogous to option premium. A long term backing arrangement (and long term means looooong term) with a fixed commitment and duration is like buying a long-dated maturity bond – there is a pretty well defined yield over time (the horse’s ROI).

    These two types of backing arrangements have very different value characteristics (on both sides).

    Andrew, if you can construct some derivative security built upon your lifetime ROI (coupled with a life insurance policy and on-line poker legality/illegality adjuster provision), ill buy some 😉

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