Invest Like a Gambler

By Wayne Mulligan, on Thursday, June 19, 2014

Any gamblers in the house?

Here’s an interesting fact for you:

The odds of consistently winning at poker are about 5% to 10% -- that’s similar to the odds angel investors face when trying to pick winning start-ups.

Amazingly, despite the odds, an elite group of poker players consistently manages to make money.

Today we’ll show you how they do it – and we’ll show you how their secret can make you a more successful start-up investor.


By definition, gambling means “to play games of chance for money.”

And indeed, “chance” is the operative word here.

It implies a sense of randomness, an uncertain outcome.

But the world’s best poker players don’t leave their success to chance.

30,000 or so “professional” poker players roam the globe today...

3% to 5% of them consistently make money.

But how can anyone consistently win at a “game of chance”?

The secret is surprisingly simple.

The Secret to Making Money in Poker

When you saunter into a casino, the odds are stacked against you.

And the longer you stay on the floor, the more likely it is that you’ll be “relieved” of your money.

But there’s one exception:


Poker is the only game where players can, to a certain extent, gain “an edge.”

The “edge” comes from knowing the game’s mechanics better than others...

Being able to calculate the odds of each hand.  Knowing how to place bets so you optimize your “take.”  Knowing when to call, raise, and fold.

The edge adds up. More often than not, someone who knows the ins-and-outs of poker will outperform inferior players.

Which is why “table selection” – literally, the table you choose to play at – is the single most important thing you can do to improve your chance of success.

If an experienced player sits down at a table full of amateurs, he’ll have an above- average chance of walking away with a profit.

And this is exactly how the pros earn a consistent living.  It’s their unfair advantage.

They wait. They watch.

And when they see a table full of amateurs, they collect.

The Secret to Making Money in Early-Stage Investing

Now let’s turn to how this applies to early-stage investing.

Just like poker players, early-stage investors need to stack the odds in their favor at the outset of the game. They need an unfair advantage.

How do you get an unfair advantage when you’re investing in start-ups?


Rapidly filter out the “losing hands” before you ante up!  Which means picking the right table.

Here are three quick filters to use to make sure you’re never sitting at the wrong early-stage investing table:

1. Valuation – All else being equal, investing in start-ups with low valuations is a smart move.

The data is clear:

Most start-ups aren’t “successful” – i.e., they don’t IPO or get acquired.

And the ones that are successful typically get acquired for less than $100 million.

In fact, most of those acquisitions happen for less than $50 million.

If you’re targeting a 10x return for each investment – which you should be –narrow down your start-ups to those with a valuation of $5 million or less.

2. Technology-Driven Businesses – Early-stage companies are inherently risky.

But the longer they survive, the more likely it is that they’ll figure out a formula for success.

Survival is tough when you’ve already spent a good chunk of your precious capital to manufacture a physical product, or to buy a factory.

What insight should you glean from this?

Invest in businesses that don’t require much capital!

Invest in businesses that are capital efficient.

Look for technology-driven companies – like software companies that make online games, or companies that use the Internet to sell their products or services.

For example, Crowdability is a research and publishing company, but we use the Internet to distribute our products.  We’re a technology-driven business.

Tech-driven businesses tend to have low operating costs. Low costs means lower losses. Lower losses means the ability to fight another day.

3. More Than One Founder – Start-ups with more than one founder tend to be more successful.  A co-founder gives you someone to strategize with, someone to share the work, someone with different skills and perspectives.

Launching Crowdability would have been close to impossible if Matt or I had tried to do it alone. And it certainly wouldn’t have been as successful.

This study puts the success rates of multi-founder start-ups into a quantitative framework.

What’s the ideal number of co-founders for a successful start-up?

2.09 founders.

I don’t know what .09 of a founder looks like, but having more than one person on the founding team clearly puts the odds in your favor.

Choose the Right Table

These three filters are equivalent to “table selection” in poker:

They’re a quick way to stack the odds in your favor at the outset of the game.

Once you find a company that passes these three initial screens, that’s when you should take the time to dig into the investment more deeply.

Happy Investing!

Best Regards,
Wayne Mulligan
Wayne Mulligan


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