Entrepreneurs know what it takes to get things done.
When it comes to funding your ventures, making decisive management calls, and propelling projects forward – you’re motivated and effective. But because of your intensely focused approach, you often overlook some of the key investment considerations that will help you become a sustainable “career” entrepreneur.
Every startup includes risk, but if you take a broad view of investment strategy, you can dramatically increase your own probability of personal success – far beyond that of any individual project.
Here are five common investment assumptions you may want to think twice about as an entrepreneur:
1. Stock Options are the Holy Grail
Building equity in a business you’re participating in directly is smart, no doubt about it. And stock options do indeed provide leverage towards that goal. But just like any business, your personal balance sheet needs a thoughtful balance of leverage and cash-flow.
While you likely believe your current business has vast potential and strong probability of success, any experienced serial entrepreneur will tell you that starting a business is always risky. Be realistic about the fragility of your venture and obtain reasonable cash-flow, even if it means giving up some equity upside.
Not only will that cash help you preserve the critical mental stability required to stick out your vesting periods, but if you can save some of that cash you will find yourself with more runway for your next venture. As a serious entrepreneur, building runway (aka capital) for your future projects should always be in the back of your mind.
2. Retirement Accounts and 401ks are Foolproof
For the committed entrepreneur, it’s especially important to re-examine the traditional advice to load your retirement accounts to the brim.
Now, if your employer is offering incredible matching terms that skyrocket your returns, that shouldn’t be passed up lightly. But it’s all too easy for the entrepreneur to forget that money placed in a retirement account cannot be used to fund new ventures or invest in other private ventures without significant penalty or interest. A dollar deposited into an IRA or 401k must be discounted to some degree due to the lack of flexibility of that dollar going forward.
It’s certainly wise to save in a tax-deferred setting, but be mindful of your need for accessible personal operating and investment capital.
3. Private Equity is Only for the Rich
“Private equity” is often misunderstood; it’s simply business ownership characterized by less bureaucracy, overhead, regulation and layers of decision making. Viewed another way, it’s equity that’s flexible, maneuverable and responsive – fast and light.
How does this affect you? As you meet other entrepreneurs throughout your career, use those connections to your advantage – don’t be afraid to help fund those projects. While making investments like this can be risky, you’ll receive the huge additional benefit of building a reputation as an active business person.
This will pay dividends in the form of new connections and better connections over time. While you can certainly become over-invested in this area, it’s much more common for young investors to be under-exposed to fledgling private businesses.
4. Short Selling is an Advanced Investment Strategy
Short selling is often associated with high-risk bets against individual public companies. But smart entrepreneurs recognize its other use – as a highly effective risk management strategy that can generate serious tax benefits.
At some point in every entrepreneur’s career, there will be periods of extreme turbulence. During these times, you may find that your risk appetite changes quickly and dramatically. A common reaction is to want to reduce risk where you can; an inexperienced investor might be quick to sell some of their liquid investments to get comfortable again. But this approach is often very inefficient. Not only might it require multiple transactions and associated costs, it could also do great damage to their tax position by forcing short-term sales.
Savvy investors recognize it’s often far more effective to short-sell an equity index against the rest of their portfolio to reduce their net exposure (risk) without damaging their long-term investment strategy – because more often than not the turbulence passes and you’ll wish you hadn’t been so quick to sell.
Think about it this way; rather than avoiding a table saw simply because it’s dangerous, take the time to understand your tools and learn their safe operating techniques.
5. Your Startup Equity Needs All Your Attention
The most common mistake entrepreneurs make? Not taking adequate time to educate yourself about finance.
You’re probably right that from a short-term perspective, your time is best spent coding your current project. But from a long-term perspective, you’ll reap huge rewards by doing your financial homework. Take some time each week to teach yourself something new about corporate finance, accounting or legal. Remember that your investors ultimately have their own interests at heart – so you want to know enough to protect your interests effectively. This is not only critical to your reputation as a lifelong learner, but it’s crucial to your ultimate success as an entrepreneur.
Hal Hallstein is the founder of Registered Investment Advisory firm Sankala Group LLC. An entrepreneur himself, he thrives off helping other entrepreneurs invest successfully. When he’s not thinking about markets, he’s often back-country skiing or rafting.
