Dear investor! Did you batten down the hatches?
When I was a kid, I loved books and movies about sailors and submariners. I loved the safety systems of ships. If a ship has a breach, it doesn’t always lead to its sinkage. It is enough for the sailors to isolate the flooded compartment.
It’s not like that in business and investing. People regularly “sink their ships.” Many of my wealthy friends and acquaintances have stepped on this rake and some of them have even been left without any capital.
Should you lend to a friend or invest?
One of my friends called and asked to meet me. He came to our meeting in a fancy car. Here was a dialog that followed:
Friend: Hey, I’m having problems in my business. I need to plug my financial hole as soon as possible. The creditors are pressuring me, I can’t sleep at all. Could you lend me $100,000?
Me: I won’t even have $1,000 for you.
Friend: Hmm, aren’t you supposed to be a millionaire?
Me: So what? To get the money out, I have to sell assets, pay tax on profits and incur expenses. Why all of a sudden should I do that?
Friend: And there’s nothing at all in your bank account?
Me: There’s my financial cushion. I can only spend it in case of emergencies.
We shook hands and went our separate ways. Such a technique works flawlessly in case you need to get rid of the beggars. If they ask for a small amount (up to $750), then I give them the necessary amount and say my goodbyes. If they ask for a larger amount, then I provide them with my arguments and say “no”.
But what about the awkwardness? I set a specific goal for my therapist — I don’t want to feel awkward when I refuse my friends and my family. We have solved the issue in one session. Now I no longer have acquaintances who owe me a large sum of money:)
Sacrificing everything for business?
We have a well-known entrepreneur in Russia who built Moscow City — Sergey Polonsky. One time in an interview he said that he was not ready to do business with partners who would not sacrifice much to save the business. For example, they would mortgage their apartment.
This is the same question venture capitalists sometimes ask startup CEOs before investing in a project. People make unnecessary commitments for the sake of short-term gain, and then find themselves without their underpants.
I think that is stupid. Business is not my baby. A venture capitalist is risking money, and the head of the business is risking time and reputation. It remains to be seen which of these options is more expensive.
I’m worth it! So I’m going to destroy my business.
Another example of a sad story. I had a friend whose business was generating $100,000–200,000 (!) a month into his pocket. But he managed to spend it all!
His head was constantly being filled with other people’s thoughts — his wife’s, parents’, and ex-wife’s:
· Let’s build a house.
· Let’s renovate.
· Let’s move to a “normal” country.
· Let’s buy a car for a couple hundred thousand dollars.
· I need the money. I want to send my kid to a prestigious school.
What did my buddy conclude out of these requests? He’s gotta make more money!
How did it all end? Well, the usual. The business had died, the good, expensive aspects of a happy life had to be given up for debts, his wife had left him.
And everything could have turned out differently if the guy had had an Excel spreadsheet with a budget breakdown and a good therapist.
The strong feed the weak.
I advise you to be wary if you are once called a serial entrepreneur. It sounds cool, but from the outside it looks something like this — a person has a business that has taken off. The business generates profits and feeds the owner. Also, this “serial entrepreneur” has a bunch of side entertainment projects. These projects are financed from the profits of the main business.
I regularly encounter such situations among my acquaintances. The owner of a business invests his money in nonsense projects instead of putting it aside and saving. He feels awful about giving up his projects. Then the main business begins to suffer, the side projects close down, and the businessman is left with nothing but his former glory.
Everything could have turned out differently if new “for fun” projects would have been funded autonomously or would have required no investments at all.
New opportunities
I experience the following dialogue at least a couple of times a year:
My acquaintance: “Hi. I know about an opportunity. You can make 30% annually in real estate. Can you get $125,000 out of the capital?
Me: Why suddenly? I only have time, competence, and connections. I can share these resources in exchange for a share. But if you came to me for the money, I simply do not have it.
For some reason people get offended and leave. But it doesn’t upset me one bit. I don’t want to be treated like a moneybag anymore. Thank you, I’ve had my share.
How I find leaks and batten down the hatches
The breaches in my ship appear regularly. So, I regularly patch them.
My principles are the same as those of sailors:
· Business is separate.
· Consumption is separate.
· Caring for loved ones — separate.
· The financial cushion is separate.
As soon as one compartment begins to flood the others, it is isolated.
My main tool is Excel. I’ve been keeping a budget since 2006, looking at spending items and drawing conclusions. Analysis example:
· My blogging hobby began to take up over $2,000 a month. I need to get it to be self-sufficient.
· My eldest daughter needs a lot of money, more than $750 a month. I will help her with her business. Let her earn her own money.
· My parents complain about the low standard of living. I’ll help them for a while. But at the same time, I will teach them how to turn their liabilities into assets.
This is far more important than discussing portfolios, politics, and economics. This is where we lose money, this is where our plans for life with capital can collapse.
