The Investment Scientist

Successful Entrepreneur, Personal Finance Failure

Posted on: May 9, 2012

They don’t necessarily overlap

I met Joseph in a startup networking event. He was trying to attract investors for his latest venture. He has an impressive resume: he founded a tech company that was later sold for tens of millions of dollars in the 1980s.

I was immediately struck by the “never say old” motto of this 75-year-old entrepreneur. But one thing did come across as odd: he was trying to raise a mere $500k for his new venture. Why didn’t he just fund the venture out of his own pocket?

A few months later, I invited him to a charity fundraising dinner where the ticket is $100 per person. He finally admitted to me: “Michael, I don’t have an extra $100 to spare.”

How could a successful entrepreneur who founded, built, and sold a company for tens of millions of dollars end up without an extra $100 to spare? Well, after retiring in his 50s, he dabbled in a number of failed business ventures, speculated in tech stocks in the late 1990s, and got hit again by the housing bubble in the 2000s. Now in his 70s, he is near personal bankruptcy.

Over the years, I’ve talked to many entrepreneurs in different stages of their lives. I found they share a few common traits that would be conducive to business success but may be hazardous to financial well-being.

One, they are perpetually optimistic. If they were not, they wouldn’t have gone through the trouble of starting and building a business. However, their optimism also leads them to be carefree about their financial security. They believe money will always come, so why worry.

Two, they are risk takers. This trait is good for business, but when applied to personal finances, it becomes problematic.

Three, in business, they usually surround themselves with counselors. So their ideas are vetted and the execution is generally carried out by others. They usually don’t give themselves the same luxury of wise counsel in personal finances. They do what they please.

That’s why a good many of them are in financial trouble in their old age. I personally know more than a few.

At the risk of sounding self-serving, I think all successful entrepreneurs need a wealth guardian working for them in a fiduciary capacity. The most important job of the wealth guard is not to beat the market, but 1) to watch over the financial big picture; 2) to serve as a wise counsel to the entrepreneur and 3) to help the entrepreneur make sound and prudent financial decisions.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

4 Responses to "Successful Entrepreneur, Personal Finance Failure"

I’ve also found that many successful entrepreneurs have a hard time understanding diversification because they are used to the 100% backing of a single idea. In fact, at my former job at a financial planning firm the president’s retirement was based on selling his business. All his eggs were in one basket.

Robert,

It’s amazing, isn’t it? People who are very good at making money aren’t good at keeping it.

Michael

It is apparently a universally overlooked factor (as we see evidence of it in Australia as well) that the ‘baby boomers, even the entrepreneurial ones, were not raised in an environment of understanding the concept of ‘setting aside for a rainy day (the future)’ – and governments everywhere benefited from their rampant consumerism (spend, spend, spend).
It wasn’t until the ’80’s that laws started to arise that facilitated a ‘retirement savings’ strategy – and in Australia at least, in the early days, each change of employment provided an opportunity to ‘cash it in’ and acquire a property, fund a business start-up, etc. For many of us, the business we started back then has always been looked upon as the retirement nest-egg for our ultimate retirement.
As you aptly point out, this has not bode well for most – lack of diversification; and market timing, have often interfered with the ‘(best?) laid plans’.

Reblogged this on wealth management continuum and commented:
Entrepreneurial Baby-Boomers often suffer from dependence on their business as their retirement nest-egg: lack of diversification; and uncontrolled market timing often seriously impact them …

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

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