For employees, thinking about personal savings is relatively easy: you just set aside 20% of your monthly income in a tax-deferred account, and you do not touch that capital until you retire.
In practice of course it is not as easy as it sounds. On one side, we all prefer to spend our regular income and not save for what now looks like a long time in the future. On the other, unforeseen events that force us to spend more than we planned might happen at any time.
But at least, work is income and savings are long-term assets. The distinction is clear.
Yet for entrepreneurs, things are much more nuanced. Startuppers do not have regular income. The money they receive is what they make with their businesses. Yes, that income could be qualified as management salary, or dividends, even capital gains! But in practice any income entrepreneurs receive is the result of their hard-earned profits their companies make.
This has two consequences. First, incomes are unpredictable. Second, by putting all their efforts into developing their businesses, entrepreneurs not only earn profits but also build equity, which is what the business is worth.
An entrepreneur who has built a company from scratches, now making a profit of 100,000 USD per year with a certain regularity, could say quite comfortably to have made at least a million USD in equity.
Moreover, profits and equity should continue to rise if the entrepreneur ploughs the earned money back into the business instead of distributing it.
Then the question is: why should entrepreneurs save and invest like regular people?
Why Entrepreneurs Should Invest
The answer lies in a simple concept: diversification. The income of a small and medium enterprise cannot be as stable as the one of Microsoft. It definitely cannot be as stable as the one of Microsoft, Apple and Coca-Cola combined.
While their hearts will continue to be with their businesses, entrepreneurs should use only their brains when they think about personal finance.
Your startup could fail. Or it could earn less money than it is earning now. Or it could be valued much less than now in the future so that the equity you are counting on will not be there.
When thinking about their personal finances, entrepreneurs should not conceive their business as their only reason in life, but just as an asset. To be precise, an income-producing asset, whose proceeds can be reinvested somewhere else. The more unrelated with the business, the better it is.
I know it sounds harsh, and for many entrepreneurs, it will be difficult to do, but it is the most reasonable way to think about your investments.
Of course, it would be hard for entrepreneurs to invest the proceeds of their businesses in government bonds. Beyond the fact that they are just too boring, at current levels they do not even protect from the effects of inflation, the hidden tax that takes away a bit of your money every year.
Instead, entrepreneurs should consider dynamic assets, exactly as if they were thinking about investing in a business. These assets are of course equities and real estate.
The best way to invest in the public markets is through index funds. Low fees, great diversification, and simplicity, all in one investment.
If the entrepreneurial spirit comes up and demands excitement, startuppers should resist the temptation of becoming entrepreneurial in a field that they are not accustomed to.
Online entrepreneurs may invest in hospitality real estate, but would they buy and run a hotel?
Clearly not. Therefore, entrepreneurs should stick with index funds, achieve broad diversification, and keep their minds on their own businesses.
An interesting alternative is private assets, such as private equity and real estate. All that fluctuations in the public markets may give a headache, but a nice piece of real estate will remain as it is.
That is more complicated than what it looks at first glance, but a good private asset definitely makes sense in the portfolio of entrepreneurs who can afford it.
The first step should be real estate, perhaps a beautiful apartment in the same big international city where the startup’s head office is located.
Private equity is not an easy investment. It requires a substantial amount of money, and competition for the best assets is stiff.
Entrepreneurs willing to engage in such difficult but rewarding investments should take advantage of their knowledge and invest only in businesses that are in the same industry as they are.
It is a diversion from the rule of diversification, but in this case, it is an exception that confirms the rule.
Platforms Where to Invest in Real Estate and Private Equity
While public markets are just one click away in any broker’s platform, private assets are more difficult to manage.
Entrepreneurs can use their personal networks or use ad-hoc tools. Usually, wealth management banks offer certain private investments to wealthy clients.
Another option is to look at certain B2B portals that include opportunities for investments in private equity and real estate beyond the regular import-export activity.
A famous global one is Globartis. Other platforms include Opportunity Network and Enterprise Europe Network. As the name suggests, this latter is mainly focused on Europe.