By Henry Brown
With the rise of “bootstrapping” – the idea that entrepreneurs should generate their own capital and reinvest it in their companies – more businesses are focusing on putting their money into their own operations. But is this really such a good idea?
When it comes to investing, what matters isn’t that money is going back into the firm: it’s that money is making a return. Sure, you could plow all your extra money back into your enterprise and try to reap the rewards, but some businesses just aren’t cut out for endless growth, especially if they’re niche.
It’s important, therefore, for entrepreneurs to think about where else they should be investing their limited capital. Here are some principles for investing if you run your own business.
Build an “off limits” portfolio
Business blogs often spend a lot of time talking about the importance of keeping business and personal finances separate. There’s a good reason for this: even people who own limited liability companies will continue to pump their own private savings into a business venture, well after it becomes apparent that it is failing. Experts at Inc. magazine recommend, therefore, that entrepreneurs put their money vehicles such as retirement accounts, where you would be forced to pay penalties and taxes if you took the money out prematurely. This helps alleviate the temptation to dip into one’s long-term savings to prop up short-term cash flow problems.
Diversify your portfolio
Building an investment portfolio when you’re an entrepreneur is a different process to when you’re just an ordinary investor. Regular investors only care about the return they get. But as asset management companies, like Colbeck Capital, will attest, entrepreneurs face a different set of issues. The main issue, of course, is that they don’t want their own investments to tank if their industry tanks. This is why so many professionals recommend that they invest in industries whose value moves counter-cyclically to their own. For example, if your industry is heavily dependent on commodity prices, it might be worth investing your spare capital in things like public equity markets that tend to move in the opposite direction.
Be conservative when investing outside your business
Investing in your own company is risky. There is a lot of uncertainty about whether your company will generate any returns and if it can be sustained over the long term. For any investor, including the owner of the business themselves, startups are a risky proposition.
For this reason, entrepreneurs should put their rest of their capital into assets that are a lot more conservative. A good option is to plow money into government bonds, as these carry a low risk and modest returns. Another place to put money would be in utilities, typically considered a low-risk investment.
Skewing your external investments to be less risky helps to balance your riskier investments in your own business, giving you a risk profile that is suitable for your individual taste. Some entrepreneurs will want to take bigger risks than others, but normally these risks shouldn’t be greater than those being taken in the business.
Henry Brown is an online marketing executive. When he isn’t talking shop he’s roaming the streets of London, uncovering the extra-ordinary in the ordinary.