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Company builders who do invest outside their businesses usually don't win applause from the pros for the way they go about it. "If they run their businesses the way they run their investment lives, it would be a total disaster," says William K. Hall, a San Clemente, Calif., investment adviser who caters specifically to CEOs and entrepreneurs.
Michael Troy doesn't fit the profile of the "classic" entrepreneurial investing style described by Hall. "They get a feeling from someone, or a recommendation, or they see a business they're somewhat familiar with, and just buy some of it, whatever it is," Hall says. "The entrepreneurs who have a significant positive cash flow tend to be working with two to five different brokers, so they end up with a shotgun approach."
Since having your own business is risky enough, the question is how much risk to pile on with outside investments. Clearly, treasury bills and diversified mutual funds offer more security than the equity in any growing business does, no matter how strong the profitability record of your business to date, and no matter how much faith you have in its future. But they simply are not going to have the same potential to grow. Many business owners, like Troy, try to play their outside investments more conservatively.
But there are others -- the dice rollers -- who get involved in more aggressive money management. They reason that their competitive advantage in life is their ability to pick the right risks to take, to achieve some measure of control over those risks, and so to earn exceptional profits. One example is investing in your own industry, which undercuts diversification. Still, the professionals have to concede that sometimes that strategy works: "I look upon investing in your own sector as a major risk, but I have seen a lot of entrepreneurs make a lot of money doing it because they know the industry. I would usually try to get them to limit their exposure," says Diahann W. Lassus, a principal with Lassus Wherley & Associates, PC, a fee-only financial-planning and certified public accounting firm in New Providence, N.J.
Maynard Howe is one of those adventurous company builders. Howe, 48, is both a clinical psychologist and a St. Paul, Minn., entrepreneur who has founded three businesses over the last 18 years. Aside from the attention he lavishes on his new granddaughter, he's mostly preoccupied these days with Soundadvice for Sports, a business that arose out of his work with professional and Olympic athletes. Jack Nicklaus is the most prominent spokesperson for Soundadvice's first product, which debuts this holiday season: a special sleeve attached to golfers' clubs to help them correct their swing.
(Sensors in the sleeve detect changes in grip pressure and swing path, and activate a beeper if either is incorrect.) Howe personally financed the first phase of product development, then arranged for a private placement.
Although Howe has a well-diversified investment portfolio, he has no time for investment managers or for the notion that entrepreneurs should be concerned about setting aside a nest egg. He is adamant that a company builder's commitment to the business is gauged entirely by his or her level of investment in it. "If you own a company and you have a vision, what does it say about you if you don't invest most of your money in your own business?" he asks.
Howe describes how his investment philosophy plays out in the happy event that the business doesn't absorb all of an owner's capital. "Outside of my own business, I invest in my customers and my suppliers. That begins to demonstrate my commitment to their success. After that, I invest in people with new ideas. When I see people with exciting ideas that they're excited about, and that are truly shifts away from the tried-and-true, that's where I put my money."
Jeanne Bayless can understand Howe's line of thinking. In a previous generation, the 36-year-old daughter of a Texas venture capitalist would probably have drilled wildcat oil wells. These days, she puts her own money into new companies -- and not just the one she runs. Bayless has been with start-ups throughout her career. In January 1993 she founded AnswerSoft, in Plano, Tex., to tackle the emerging market for computer-telephony integration. AnswerSoft's first product was released in August 1994 and, with great expectations for sales of more than $3 million for 1995, Bayless and her venture-capital backers think they're looking at a gusher.
Bayless has just bought her first home and has a varied investment portfolio outside of AnswerSoft. She hasn't made a lot of personal guarantees because she was able to make an attractive deal with her investors. "Half of my savings is in secure types of investments while the other half is in start-up businesses. You learn about a lot of start-ups through your venture- capital investors. I tend to be a high-risk individual, and I will tend to invest in those types of things." Being well-connected helps. Companies in which she has invested that have since gone public include Quarterdeck, Proteon, and Cyrix. The movement of those companies from venture capital to the public market has had the interesting effect of making her portfolio safer over time, not to mention handsomely profitable. Bayless and a fellow CEO invest together.
