What do you do with the assets that aren't tied up in your business? First, make sure there are some. Second, consider how these four entrepreneurs have invested theirs

Suppose you're on an airplane, and you get into a discussion with the person next to you about personal investing. Your fellow passenger tells you his assets are pretty much tied up in just one stock. It isn't part of the Standard & Poors 100, and it isn't quoted on NASDAQ. In fact, the stock isn't actually traded at all, so there isn't much liquidity (maybe none, he concedes). But your seatmate knows the business well and has tremendous confidence in its management. And by the way, he and his wife are counting on the equity value of this one investment to take care of all their retirement needs.

Your first reaction would probably be that it sounds like a pretty poor investment strategy. But when you learn that your fellow traveler is talking about his own business, you realize he's giving you a pretty good description of your own approach to personal finance.

Most business owners have, at some point, made a decision to invest in themselves, and consequently, their own companies are their largest assets. Traditional investment advice holds that an investment portfolio should be thought of as a pyramid: a broad base of stable, low-risk holdings -- bond funds, say -- building to a narrow tip of riskier investments, such as options and illiquid direct-equity plays. But company builders typically turn the pyramid on its point. After scraping together start-up capital, and then plowing every available dollar back into the business, they share a belief peculiar to their breed: "Investing in my own business will yield the highest rate of return I can get on my money."

Sure, if the business succeeds. But where are you if it doesn't?

So far, Michael Troy hasn't had that problem. Nor has Maynard Howe, nor Jeanne Bayless. Each runs a young company that is flourishing; all three are the beneficiaries of earlier entrepreneurial endeavors. A fourth business owner, Pamela Barefoot, has confronted the issue recently as her 10-year-old company has labored through some tough times.

All four are typical company builders. They're in their thirties and forties; three are married, and two of them have children. Each is firmly focused on making the business grow, and with at least half of their total assets in their enterprises, their investment strategies reflect that. They don't dispute that there's a very good case to be made for broadening their investments; in fact, three of the four have had some success in doing so. But they contend that business ownership is a special situation -- one that allows the view that there are stages of life and company growth when it's absolutely defensible to have most of your assets in the business.

Troy, Howe, Bayless, and Barefoot share many of the traditional ideas about personal finance. It's in the details of their "outside" investments, and in how they value professional financial advice, that they differ dramatically.

* * *

Like many entrepreneurs, Michael Troy started young, buying candy for a nickel a piece and selling it for a dime to his San Marino, Calif., elementary school classmates. At age 45, Troy is the founder and president of KnowledgePoint, a Petaluma, Calif., publisher of software that assists businesses in writing personnel policies, job descriptions, and performance reviews. Troy's seed capital for KnowledgePoint came from the sale of his stake in Native Sun Energy Systems, a former Inc. 500 company in which he had been a principal but not the lead player. KnowledgePoint was founded in 1987 and has grown to 33 employees and 1994 sales of $3.9 million, earning its own place on the Inc. 500.

As company builders go, Troy is pretty typical in that he has the bulk of his personal wealth in his business. One-fifth of his total assets are diversified: "Although we've always been cash-short, and I've lived on a very meager salary, I've saved a portion of what I've earned and put it into other investments. I can probably get the best return for my money by putting it into the company, but that's a real high-risk move. So I try to balance my personal finances as much as I can."

Troy set some money aside earlier than many business owners do, perhaps because he'd had some early career successes. His personal portfolio now amounts to several hundred thousand dollars, mostly invested in growth-oriented no-load mutual funds and bond funds. Troy chooses his own mutual funds; about one-third of his portfolio is managed by his brother, a stockbroker. Overall, the investments have done well. Troy has covered most of the items on the traditional financial-planning checklist: He has a will, key-man insurance in the business, and a 401(k) plan to which he regularly contributes. He has also set aside a chunk of an inheritance for a college fund for his 9-year-old son, Dana, but he hasn't added to the fund the way he'd like to. "His college fund is the success of this company," says Troy.

In addition to his initial cash investment (and to his forgoing a salary for a year), Troy financed KnowledgePoint with his credit cards; a personal equity line on his house (which he later converted into a term loan with the house as security); and a line of credit, which he signed for personally. "My personal assets are at risk if the company fails," he concedes.

To date, KnowledgePoint's success means that Troy's personal portfolio remains intact. He has stayed the course with a strategy that he expects to ultimately leave him with a substantial -- and valuable -- equity position in KnowledgePoint. "I purposely took additional risk myself by not bringing in other investors and diluting my ownership until I could build more value in the company. What I could do -- and I have resisted this until we get into a crisis -- is move my mutual-fund investments into the business," he says. But that would work against a more diverse portfolio. "I don't want to have to commit any more of my personal finances to fund the business's growth. Now I'm ready to spread the risk by bringing in outside money."

* * *

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.

Of course, being single, Bayless can bear more financial risk, and she concedes that. Her more traditional investments are in no-load mutual funds -- primarily growth and technology stock funds -- in which someone else can do the driving. Bayless says, "I spend so much time on my business, I probably don't spend the time I should on my investments." Nevertheless, both halves of her portfolio have done well. "I've got a large enough nest egg that if something went wrong tomorrow, I would feel pretty secure for about four years. Right now the money is not enough to retire with, but if AnswerSoft succeeds, I'll be lying on the beach somewhere."

* * *

Can an entrepreneur ever really set aside money before the company is thriving? Ask Pamela Barefoot. Nobody needs to remind her of the risks of investing your life savings in the business.

Nearly every weekend, Barefoot enjoys scouring deserted beaches in search of seashells. She uses the shells as decor in the baskets of crab dip and other specialty food items produced by Blue Crab Bay Co., the company she founded 10 years ago, and which she estimates accounts for 90% of her assets.

Barefoot, 44, has a small amount set aside in a savings account and would love to be able to put money into other investments. But right now Blue Crab Bay demands all her attention -- and funds. The company has 10 employees and expects 1995 revenues of about $800,000; it's one of the largest employers in Onancock, an out-of-the-way Virginia coastal town. So far, it's no rags-to-riches tale; on several occasions Barefoot has had to use her personal savings to rescue the company. She's well aware of the risks she's taking: "I took out this home-equity loan. My father died two years ago; I was left a little money, and I lent that to the company. My life savings, too. Everything I have is at stake. I wake up in the middle of the night and ask, 'What if this doesn't work?' And I have to go, 'Well, that's OK, I've learned a lot.' "

In recent months Barefoot's business has been looking healthier; sales are up more than 60% over last year on the strength of Blue Crab Bay's new Sting Ray Bloody Mary mix, and Barefoot thinks it's the breakout product she's been looking for. But it doesn't change her personal-finance picture. The company suddenly faces the problem of managing growth, and although the Sting Ray mix is helping Barefoot sleep better, the profit it's generating is going back into the business -- into an additional 800 square feet of warehouse space, a bigger shipping table (with a conveyor), and a computer network to improve order processing. "We want to be ready for growth, but I'm trying to be cautious," explains Barefoot. "We have a new line of credit and a loan that we haven't had to touch yet. We finally have some breathing room. I feel every move I make right now is critical."

* * *

Barefoot's drive to capitalize on the Sting Ray mix shows the extent to which personal investing for the entrepreneur is a catch-22. Michael Troy is caught too. He wants to preserve some savings, but if he doesn't invest in the business, he may be limiting its ability to grow. Although KnowledgePoint is profitable, with three products out and 50% average annual growth for the last three years, the company needs substantial equity funding, of $2 million to $3 million, to continue to grow. So Troy is talking to venture capitalists and to institutional investors to avoid having to use his personal funds. "The road to capital is much harder than I thought it would be," he says.

Troy's sport is white-water kayaking, and he sees many parallels between river running and business. "When you see a big drop ahead -- water flying up into the air -- you pull over and scout it. Then you lock yourself into the boat, and soon the rapids start. You hit a hole, you brace, sometimes you roll and you're under water, you come back up, then you hit another drop. When you make it through, there's a sense of exhilaration that you did it. Business also is a rush of excitement, followed by the calm water, then another rapid to go down."

That imagery also speaks volumes about why many company builders don't invest more actively outside their businesses. There's a thrill to business, and for most entrepreneurs (especially those who revel in their popular image as swashbuckling risk takers) investing in treasury bills and bond funds just doesn't quite cut it.

In the end, Michael Troy -- like most entrepreneurs -- is thinking of his business first. He knows his is a risky endeavor, and he's well aware that he needs a security fund on the side. For now, he's on a calm stretch of river, and he can take time to savor his accomplishments and scout for what's ahead. But he can't forget that he's on a wild ride that doesn't forgive anything less than total commitment.

* * *

Michael Troy
The careful adventurer
President: KnowledgePoint

Age: 45; married, with one child, age 9

Philosophy: Focuses on the business but tries to set some money aside, most of it in diversified, growth-oriented mutual funds

Investment adviser: A brother who is a stockbroker

* * *

Maynard Howe
The superentrepreneur
Founder: Soundadvice for Sports

Age: 48; married, with one child, age 21

Philosophy: Believes that an entrepreneur's commitment to the company is gauged by how much he or she invests in it. Doesn't believe in mutual funds; invests primarily in his own company, then in other entrepreneurs, and then in customers and suppliers

Investment adviser: Follows his own muse

* * *

Jeanne Bayless
The venture player
President: AnswerSoft Inc.

Age: 36; single

Philosophy: Takes risks outside her business by investing with venture-capital friends in what she knows, such as young technology companies, some of which have since gone public. Diversifies with a range ofgrowth mutual funds, with the emphasis on technology

Investment advisers: Other venture capitalists; a fellow CEO

* * *

Pamela Barefoot
The survivalist
President: Blue Crab Bay Co.

Age: 44; married, with no children

Philosophy: Focuses on the business to ensure that its recent growth puts it on a more solid footing long-term. Has fully mortgaged her house to finance the business

Investment adviser: None


AN ENTREPRENEUR'S INVESTMENT CHECKLIST

Professional financial advisers (and business owners themselves) point to five key ways in which outside investments must meet the special needs of entrepreneurs:

1. They must not take up much time. Michael Troy explains: "I've chosen not to devote my time to figuring out how to maximize returns on my portfolio. I don't have the bandwidth to focus on the technical stuff and the fundamentals for other investments. I need to devote all my energy to seeing that the business succeeds."

2. They have to reflect the current stage of the business. The level of risk that may be appropriate for the head of a company that's reliably profitable is far different from what can be borne by the owner of a brand new start-up.

3. They must work toward the investment objectives of the entrepreneur. Traditional investment theory, this. The objective might be saving for college, a new house, retirement, or even a sum sufficient to start another business if things go awry.

4. They must deal with the entrepreneur's natural appetite for risk taking. They can balance that tendency or go with it, but they can't ignore it.

5. They should tap the opportunities not available to the typical investor. Those include tax breaks and services designed for the self-employed, such as Keogh plans, key-man insurance, split-dollar insurance funding, and special or discounted personal banking services that may be provided by your commercial banker.

According to Amy Braden, managing director of Chase Manhattan Private Bank in New York City, private banks are striving to come up with services for entrepreneurs' personal and business lives. "The service an entrepreneur needs is not what one would think of as traditional private banking in terms of management of liquid funds," she says. "Small-company owners should look at getting the personal banking services they need from the bank where they do their business banking."

The potential payoff is obvious: a banker who knows that someday you'll be looking for somewhere to deposit the money you get when you sell the business or begin to enjoy a large cash flow will be more likely to offer lower interest rates or to make an unsecured loan than one who sees that loan as the only source of income.

Oh, and one last thing: it doesn't hurt if the outside investments have some chance of earning a respectable financial return. Yet that may not be the most important feature to keep in mind. It may be enough for investments to not lose money.


THE PORTFOLIOS

Here's how the four entrepreneurs have invested their assets both inside and outside their businesses.

Michael Troy
Total assets

In the business 80%

Outside the business 20%

Investments outside the business: $250,000 - $500,000

Cash and money-market funds 10%

Equity in home 35%

Individual stocks* 15%

No-load mutual funds** 40%

*Holdings include Comcast, C-Cube, Sprint, and Antec.

**Holdings include GTGlobal Growth, 20th Century Select and Vista, Oppenheimer Main Street, and Fidelity Advisor Series.

Maynard Howe
Total assets

In the business 70%

Outside the business 30%

Investments outside the business: More than $1,000,000

Cash and money-market funds 10%

Equity in homes and real estate 45%

Individual stocks** 30%

Venture capital* 15%

*Holdings include Metrix (a supplier) and Scripps Center International.

**Holdings include IBM, 3M, and Fluor Daniel.

Jeanne Bayless
Total assets

In the business 50%

Outside the business 50%

Investments outside the business: $500,000 - $1,000,000

Cash and money-market funds 10%

Equity in home 5%

Individual stocks** 30%

No-load mutual funds* 30%

Venture capital 25%

*Holdings include Fidelity Select Healthcare, Telecommunications and Developing Telecommunications; Fidelity Magellan; USAA Growth; and USAA Income.

**Holdings include Quarterdeck, Proteon, and Cyrix.

Pamela Barefoot
Total assets

In the business 90%

Outside the business 10%

Investments outside the business: Less than $20,000

Cash and money-market funds 10%

Equity in home 90%