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Does Angel Investing = Gambling?

by | Jun 6, 2023

This post was originally published in the June, 2023 edition of the AIO monthly newsletter by Kate Tomen, VP, Business and Operations. To get updates on everything angel investing in Ontario, subscribe to receive our newsletter directly here.

AIO recently attended the ACA Angel Investing Summit in Las Vegas. It was a gathering of angel group operators, investors, and startups. As a second time attendee, it was great to see once again the interest in Canadian startups, particularly in Life Sciences and Artificial Intelligence.

During the conference, AIO participated in a panel discussion on “Angel Collaboration” with Jeffrey Lang from Desert Angels and Nathan McDonald from Keiretsu Forum hosted by our friends at Dealum.

The irony of hosting a conference all about Angel Investing in Las Vegas is not lost on me. We frequently compare angel investing to gambling and a startup exit to hitting the jackpot.

I have never been one for gambling, but when in Rome, do as the Romans do. So, I sat down at a Blackjack table to play my first ever table game to see what’s riskier: angel investing or gambling?

When you are standing on the casino floor of the Bellagio, it’s impossible not to think about Oceans’ 11. In the movie George Clooney, as Danny Ocean, tells Brad Pitt’s Rusty, “Because the house always wins. Play long enough, you never change the stakes, and the house takes you. Unless, when that perfect hand comes along, you bet big, and then you take the house.”

And sitting at that Blackjack table, I did indeed learn that the house always wins. Casinos are smart, innovative, and masters of constantly changing the probabilities and designing games to give the house the winning edge.

So, is angel investing the financial world’s lottery? That is not entirely fair comparison. But I don’t want to sugarcoat the high-risk, high-reward nature of investing in startups either. In Angel investing, you must be willing to take a certain amount of risk and deal with a large amount of bad news.

Kate on a discussion panel hosted by Dealum about angel collaboration at the ACA, along alongside Jeffrey Lang from Desert Angels and Nathan McDonald of Keiretsu Forum.

Danny Ocean would have gotten a few things wrong if he were discussing angel investing. But unlike gambling in a casino where the odds are stacked against you- and the favoured towards the house- you can take some steps to mitigate risk in angel investing.

  • Play long enough to build a diverse portfolio – and change the stakes! – of 10-20 investments spread among several ventures and industries. Building a diversified angel portfolio- and spreading the risk- does change the stakes.
  • Do your due diligence. Counting cards, while illegal, helps you to assess the probabilities and potential risks of a card coming up. A throughout due diligence process does the same- it allows you to identify and understand the risks involved. With any decision, data will help make that decision easier.
  • “You bet big, and then you take the house.” With angel investing, you need one startup in a portfolio of many to hit the jackpot to see outsized returns. We have all heard the stories of an investor who took a risk at a company’s early, critical stage and won big.

The house doesn’t always win in angel investing. When you invest in a startup, a ripple effect happens. Jobs are created, local economies are strengthened, families are supported, dreams are realized, and technology advances into the future. With an angel investment, everyone involved wins.

And when that entrepreneur exits, they will likely put money back into the ecosystem, creating an endless cycle of support for our society’s risk-takers and venture builders.

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