By Lauren Keyson
You know the famous cartoon where the entrepreneur sits across from the investor and says, “With my brains and your money, we have nothing to lose other than your money.” It takes me to the premise of this post which is that entrepreneurs make poor investors and investors make poor entrepreneurs. But why? After all, it’s about making money and everyone who has made money has been tenacious, courageous and confident.
“The role of an entrepreneur is to make things happen,” said Aaron Lasher, a monetary theorist and management consultant. “ If starting a company were easy, everybody would do it — so successful entrepreneurs tend to benefit from a healthy dose of impatience. They operate as quickly as possible to accomplish their goals, whether inspired by the enticement of a large payout at the end of it all, or fear that somebody will eat their lunch if they dilly dally.
“Investors, at least the ones who write big checks, seem to be less affected in general — investors tend to be more stoic about the world. They care, but they can wait. If entrepreneurs are the builders, then investors are the gardeners – planting seeds for the future, tending to them from time to time, but not all the time,” he added.
The basic problem with “investor entrepreneurs” is that entrepreneurs’ confidence in their abilities and their business can spill over into their investing habits. Emotions push them to do the wrong thing at the wrong time. Bill Harris, the CEO of Personal Capital agrees with the supposition that entrepreneurs make for terrible investors. “I have yet to hear a Silicon Valley start-up founder confess to a lack of belief in his or her own company or skill set. The confidence that propels your entrepreneurial drive can create problems in managing your investments.”
“It doesn’t help that as an entrepreneur, you’re trained to focus on the here and now,” he added. “Long term is next year. Believe me, I get it. But that short-term mindset makes for a lousy investor who chases hot trends in rising markets and bails in bad ones.”
Although several entrepreneurs make smart investment decisions, the general rule is that they make dreadful investors in real life. Often it’s because of the way the make decisions and use their business knowledge and understand risk.Entrepreneurs assess risk differently than an average investor. For entrepreneurs, risk is considered missing out on a potential opportunity. For normal investors, risk is often expressed in terms of potential downside. There is also the assertion that investors play for the long term.
“The primary goal of an entrepreneur is to create a fortune, in part by taking significant risk when necessary and when the potential return warrants it,” explained François D. Sicart, founder and chairman of Tocqueville Management Corp. “The goal of an investment manager is to protect a patrimony against (or through) economic, political, or financial crises – as well as against the loss of purchasing power due to inflation. But the successful entrepreneur and the successful investment manager have different skill sets and instincts. Good judgment demands that one should not attempt to practice in the other’s field of excellence.”
Author Tom Hendrickson said, “Entrepreneurs embrace risk. Investors do all they can to shun it. An entrepreneur thinks: I can build a better mousetrap. Entrepreneurs, at times, are fueled by, I’ll say, hazy ambition. Not “blind” per se, but the future is likely unclear. An investor thinks: How do I buy this incumbent mousetrap company for less than I conservatively value it. Investors despise uncertainty or lack of clarity; they look for areas of investment where there is predictability. They focus on the price that they can pay for an asset and leverage the level of predictability.”