Entrepreneurs - How to Manage That Windfall !

Entrepreneurs who have a liquidity event are often like lottery winners. They are not well equipped to know how to manage the money esp if they are not from a wealthy family and have always lived a more normal/middle class lifestyle. They can end up being too conservative or too risk taking and the worst part is that they may not even be aware of it. Entrepreneurs also have an added problem of usually having a big ego, always optimistic and wanting to make all the decisions ourselves. Good recipe for investment failure.

I am writing this article so share some learning experiences which i had over the years. Both from reading, own experience and from others. Please feel free to comment and add experiences.

1) Don't touch bulk of money for next 6-12 months

Say you suddenly now have X million in the bank after a trade sale. There is a further prospect of another Y million over the next 2-3 years. You feel rich and super liberated. At the same time, everyone seems to expect you to give back and to start showing the moolah.

I would suggest to just do nothing major with the money. Put 90% of it in FD or a few 6 mth super safe bond. Let yourself and your family get used to your new found wealth. By all means, go for nice $$$$ dinner, buy a cartier ring or hermes bag for your loved one. Or take a 5 star vacation with the family for once. But don't spend anything more than 1% max 2% of your new net worth on these extravagant purchases. For Singapore, it means don't go buy a sports car that costs $500K right away unless you have $25M or more.

Note i don't mean that we should not buy the sports car unless we have 25M or more. What i mean is that we should let the money sink in and let our brains adjust first. Then if 1-2 years later, you still think that 500K sports car or 100K luxury watch is worth buying, then go get it!

After 6-12 months is up, if you have been doing your homework below, you will have an idea how to invest or work it. Your sense of value will also have adjusted and you will be less prone to impulse buys or dumb financial decisions.

2) Admit you are not a financial planning expert. 

Entrepreneurs do well because we are experts in our own micro area. Whether it is software, internet, manufacturing, F&B etc. We need to admit we are not experts in the field of financial planning and portfolio management. So get a private banker(s) to help you.

Most private banks will let you open an account with min US$1M USD and especially if you show you have more to come or with other banks. Be discerning, there are private client solutions out there which is a sandwich tier between Priority Banking and Private Banking. Not so good because their fees tend to be higher. Go for the actual private banks and if possible get a referral so you start with a good relationship manager.

Apply your same determination to build your business to understanding the world of personal finance. Be patient and take the time to learn from others. For starters, learn indepth about the following terms :

Fixed income, equities, interest rates, private equity, hedge funds, portfolio allocation, rebalancing, yield, ROI, options, structured notes, dividends, commodities, gold, property, leverage, inflation.

3) Set Goals for the Money

Now that you have a lump sum, you need to decide what goals you have for it. Is it to preserve and grow this capital? Is it to take high  risks with it? This topic is frequently tied up to the actual number you require for financial freedom. For most living standards in SG, it is about S$3-5M range that will allow for retirement in your 40s to 50s. For people who live it up more, even $10M is not enough - skies the limit.

A good advice i got from a tech "qianbei" (older expert) is to build a stable property/bond/equity portfolio that generates cash flow that pays for all annual expenses. So if you spend $360K a year, then at 4% inflation adjusted real returns, this portfolio needs to be about S$9M excluding your residence. The extra money above this 9M can then be used for starting a new business or investing in startups etc.

One word about investing in startups. Be very careful and be prepared to lose all the money. A wise man told me before to spend not more than 10% of your net worth in such investments. Also, for this 10%, spread it out into 50K angel sizes and make sure you can invest in at least 10? Otherwise no diversification. If you can spare less than 500K, i think it makes more sense to be an LP with a venture fund.  I know readers may disagree on this. Feel free to comment and share.

4) Be aware of vastly higher mountains, maintain humility, give generously.

Don't let money change you. We are still the same people. We just have more responsibility since we are lucky enough to have exited our businesses. Continue to be useful to your family and people around, continue to learn and be generous. One method that has worked very well for me is to interact with people who are both a lot more successful and a lot less successful in terms of wealth or career. Listening to the both groups share their experiences and perspective and observing keeps me grounded.

We can't take our money with us. So give generously annually if you can. Many people lose out on the genetic/life lottery which you won. So give back to society and worthy causes in a sustainable way.

5) Spend within your means!

Be careful not to be seduced by the ever upward spiraling lifestyle which one segment of society espouses. If you are below 35 and have self-made millions, there is a tendency to think believe you can duplicate it again and be overconfident in your next venture or investments. There is also a possibility you may upgrade your lifestyle to beyond your income and wealth. Note, i am not advocating to be stingy, upgrade your lifestyle by all means just don't go above it. A good rule of thumb is that you should aim for total spending  <70% of total income per year.

You did not get to exit your business without brains, so apply it to model carefully what you can or cannot afford, use it to plan out your investment plans and act on it.

I hope the above 5 points help fellow fortunate entrepreneurs in terms of starting to think about what to do with  their new found wealth. Feel free to email me or add comments.

How to get good advice/insights from others?

This is a tough question which I encounter quite often. Entrepreneurs frequently feel very lonely and we sometimes do not know how to even start handling the problems that are in front of us. Some entrepreneurs swear by having a formal or informal board of advisors. Others say getting advice is a waste of time. I will share my personal experience on this topic and readers can draw their own conclusions. I believe it is not a waste of time but we need to have the right mindset and approach. Learning this way frequently has high impact to my business and helps me be more confident.

1) My business never got a formal set of advisors. We did ask around back in 2001 to see if anyone would join us formally but in the end it did not work out.  I remember asking a politician and a GLC MD this and they both turned us down on grounds that they were too busy. Now on hindsight, i think they were right to turn us down for varying reasons.

a) I did not attempt to align them at all. No talk of equity, no clear idea how they can add value.  Not that i think it makes sense to offer advisors equity except in very special cases. But i did not know that then.

b) I like to think they liked us and were self aware. They new that their value add to our work was minimal. Both were not business owners or business coaches, so I think from their point of view, they also wondered what kind of advice or coaching could they value add with.

2)  The next time i got great learning was in 2003/4 when i got to meet Mark Chang who founded Jobstreet. Obviously as competitors, he did not advice us anything but what i learned just interacting was how an entrepreneur should think and how a business is run. We must have spent at least 40 hours interacting with him.

This is an important learning point. Frequently, the best advice i have gotten is from just paying attention to what other people do and say. From there, i will notice key attitudes and mindsets they have which point the direction to where i should go. Most recently, we paid a visit to Patrick of catcha at his office and i went away with some good food for thought on the psychology of Snr Mgmt.

3) Another example of learning is when i visited eFusion office back in 2007 or so. Looking at how metric driven that business is (they had whiteboards lining almost all the walls of the office!), gave me the advice i needed. Of course, this was reinforced by what Sam shared and it pointed and confirmed for me that my business needs to be ultra metric driven. This was before it became a trend.

4) Advice can directly sought. I have experienced this in an impactful way. When i was selling the company , i got in touch with an old friend who has done a fair bit of M&A work and whom i knew was a brilliant fella (scholar, mckinsey etc). Because as entrepreneurs, it is usually the first time we are encountering many concepts and terms like earnouts, reps and warranties etc, it helps to level the playing field by getting experienced professionals on our side. Together with a good lawyer, both proved to be invaluable in understanding the entire due diligence process and in negotiating the S&P agreement.

But what they were of little help with was on mindset to have during this process. Our business had no VCs, shareholders were almost all family and 1 CTO old friend. What helped me was a group of business owners whom i meet regularly. Their sharing on similar situations and view points helped tremendously.


5) Advice & insights can also be garnered from reading online and print literature and connecting the dots with our own experience. Recently, i have been reading many HBR case studies and books by Harvard professors (my better half is taking a course there). I am the type of person who learns by reading, so i actually find that advice and insights can come very much to me via reading good quality books.

For example, "The Man in the Mirror" by Kaplan is really a good book that has much insight on leadership. And by connecting the dots with own experience, it is as good as speaking with many advisors in my opinion.

So looking at the above cases, there are a few learning points.

1) Advice seems to be best for me when it comes from fellow business owners who are more advanced along their company development. This is extremely important. Learning from the snr management team of an established business is different from learning from the actual owner.  Esp if the snr mgmt in question does not own equity.

2) Advice or learned insights can come when there is a clearly defined problem which we actively seek relevant people to get their opinion on, or it can come from serendipity where i learn from osmosis when interacting with business owners.

3) Professionals can give great advice but only if they are in the field they are advising on and if we are asking the right questions. So stuff like mindset learning not so useful but stuff like what are industry norms for earn outs, or what is fair based on the thousands of warranties they have seen or how to do best SEO/SEM etc

4) The person giving advice and sharing matters a lot. You need to view what they say with the background of what they come from. Eg. an american CEO of a F500 company's views on M&A considerations is very different from a 10M businesses view.  But the same CEO view on leadership and the exercise of it may not be that different. But if against a 100K startup, then it may be too alien again.

5) If you are the reading type, learning from written case studies or books can be an excellent way to learn too. Only gripe i have is that there are too few case studies written for startups and SMEs. Most are for big organizations.

Hope the above helps! Feel free to share your experience with getting entrepreneurial insights and advice.