When Entrepreneurs Go All, Diversification Doesn’t Fit
If you’re an entrepreneur, traditional financial advice, starting with the drumbeat of diversification, does not apply to you.
I know because you told me in hundreds of interviews I conducted over the last decade. Entrepreneurs like you expressed frustration with being told how to invest in multiple index funds all over the world. After all, that advice is based on rules intended for people with stable incomes and jobs who don’t need to invest lots of money in their businesses.
So you’re told, “Never put all your eggs in one basket.” But guess what — whether you meant to or not, you already have. You’re the opposite of diversified.
See if this sounds familiar. You start a little side project. You work crazy hard on it and use every spare minute you can find, including nights and weekends. After tons of hard work and some luck, you gain traction. Then, you make a calculated decision to go all in with 100 percent of your time, energy and money.
You may have even leveraged your home, credit cards and hit up mom or dad to keep things going. Then, there’s that round of funding you raised from friends and family. Diversify? At this point, you’re beyond 100 percent in.
The good news is that you’re not alone. In fact, you’re in good company. From your neighbor who started a doughnut shop around the corner, to entrepreneurs like Elon Musk, almost everyone who’s crazy enough to start a business knows what it feels like to be all in.
You can frame this feeling by using a very basic financial principle that came up during a conversation I had with my friend Blair Enns, the founder of Win Without Pitching. I asked him two questions:
1) How is your money invested?
Blair responded quickly and concisely:
1) Growing my business
2) Return on investment (R.O.I.)
Blair didn’t give brief answers because he lacks the time. He sent me these answers because they were no-brainers for him. What else would he ever want to invest in? For him, his business is the most awesome thing in the world. If it wasn’t, he wouldn’t be in it.
Using a spreadsheet to make a calculated guess about the return on your investment is an important part of building a business. But for entrepreneurs, a huge part of the reason they create a business isn’t captured in dollar signs and numbers. It’s a way of life, and the act of entrepreneur-ing often comes with an R.O.I. that a more conventional, more secure life path can’t provide.
That return includes being passionate about what you do. Being your own boss. Feeling that pit in your stomach when you’re all in and the immense elation when your hard work pays off. Those things don’t fit neatly on that spreadsheet.
So, the next time somebody asks you, “How’s your money invested?” forget about diversification and mutual funds. Instead, you can answer with pride, “In my business.” And if anyone asks you why, just answer with those three simple letters: R.O.I.
This column originally appeared at the New York Times on December 5, 2016.