A few weeks ago I was at University of Missouri-Kansas City, speaking to students in their RVA entrepreneurs program. During the Q&A, a young woman asked me a simple question: "How should I look at investments in a small business?"
My answer was immediate. "Go study poker."
She looked at me like I'd lost my mind. "You can't tell me to go play poker. I'm in college."
"I can do whatever I like," I said.
Unfortunately, the session ended before I could explain what I actually meant. So here's how I would have expanded, given the chance.
I wasn't talking about gambling. I was talking about risk — specifically, the disciplines that separate professional poker players from amateurs. In my opinion, they translate directly to angel investing in start-ups.
Pot Odds & Expected Returns
In poker, before you put money into a pot, you can, if you're good at math, calculate your "implied odds." That's the ratio between what you could win and what it costs to stay in the hand. You are, of course, making that calculation with incomplete information. You know your own cards, but everyone else's hand is hidden.
Angel investing works the same way.
First, you look at the small business or investment you want to make. You learn about the team, the product, and the market. You build castles in the sky about where you think the market is heading. Is this company riding a wave, or fighting against one? Finally, you estimate what an exit might look like in three to five years.
The next step is to assign a probability to getting there. Say you put $5K into a startup and you believe there's a realistic exit that would return $50K to you. That sounds great. But if the honest probability of that exit happening is 15%, your expected return on that investment is $7.5K. That's still a bet worth making on a $5K, but it's a very different emotional reality than the $50K number you had in your head. Now, imagine the probability is 5%. Your expected value just dropped to $2.5K, and suddenly you're looking at a likely loss.
Poker players do this math instinctively on every hand. They don't fall in love with the size of the pot. They care about the odds of winning it. Investors should think the same way. That is your expected return.
Bankroll Management & Portfolio Construction
Another discipline that poker players exalt and can bring to investing is bankroll management. Imagine you're a poker player with $1,000 in your bankroll — you'd be insane to enter a tournament with a $1,000 buy-in. One bad run and you're done, broke, out of the game. Instead, you play $10 tournaments, a hundred of them. You give yourself enough runway for variance to even out, and for skill to show up in the results.
The same principle applies to investing in small businesses. If you have $50,000 to deploy, putting all of it into a single startup is a coin flip dressed up as a strategy. But taking $5,000 and putting it into a pool investing in a local coffee shop? That's a fundamentally different risk profile. You haven't bet your entire stack on one hand. You've given yourself room to be wrong, and room for the winners to pay for the losers.
This is the part most first-time angel investors get wrong. They fall in love with one company, one founder, one pitch, and they go all in. That's not investing. That's hoping.
Tilt & The Emotional Investor
Finally, there is tilt. That is when a poker player starts making bad decisions because their emotions have taken over. Maybe they just lost a big hand they should have won, they're chasing a loss. Or, maybe they're up big and start playing recklessly because they feel invincible. The cards haven't changed, but the player has.
I've seen this happen in business investing too. Over the course of building a few businesses, I've sat across the table from founders who were in love with their own company's story, and I've sat next to investors who couldn't walk away from a deal even when the numbers were screaming at them to fold. The emotional pull of a deal you've already put time, energy, and identity into is enormous. It's the sunk cost fallacy wearing a suit — or a hoodie, if you're in California.
The best poker players have a rule: if you're on tilt, you get up from the table. The best investors act the same way. They set their investment criteria, and they don't deviate from them in the room. The decision to invest or walk away should be made by the calm, sensible version of you that wrote the criteria, not the version of you that just sat through a passionate two-hour pitch.
One major caveat
If your idea of "investing" is really about building long-term wealth through a 401(k) or retirement account, none of the above applies. Go read Benjamin Graham's The Intelligent Investor and Burton Malkiel's A Random Walk Down Wall Street. Build a 60/40 portfolio split, or put your age in bonds as a % and the rest in ETFs. Use index trackers, dollar-cost averaging, and tax-loss harvesting at the end of the year. That is the best way to get wealthy slowly and reliably over a long period of time.
But if you're looking at angel investments in small businesses, and you want a framework for thinking about risk, you could do a lot worse than studying the poker professionals.
I just wish I'd had the chance to tell her that.
One last thing. I am not a financial advisor, an investment consultant, or anything close. I'm a guy who makes tablet presses and capsule fillers for a living and happens to have sat through enough deals and played enough poker to have opinions. If you're about to invest meaningful money to you, talk to your broker, your accountant, or literally anyone with a license before you listen to a guy who learned risk management at a poker table.