If you’re an entrepreneur, you’re probably “risk hungry.” You make the most of opportunity by embracing risk and by always going first into the unknown. And, for the most part, your efforts pay off, especially when you have nothing to lose.
However, once you've hit traction and you've built momentum after the value creation phase of your business, the "all-in" risk taking can be unnecessary given your circumstances.
You might think that you do better jumping without a safety net, but having it “all on the line” isn’t a badge of honor or a winning strategy.
But that kind of stress isn’t necessary when you can store cash in the good times, so you can be more resilient in the bad.
That’s why building an entrepreneur's safety net is the best way to keep walking the tightrope in the short run while being in a position to keep playing for the long run.
Timing, luck, and a whole host of complex factors play into starting a successful business, but there’s always a natural ebb and flow to both markets (as we’re seeing now) and our success.
When things change, you want to be able to have the time and ability to keep going.
The best way to position yourself to continue taking risks is to de-risk.
It’s for this reason that I recommend that founders build a cash cushion that helps you play the long game.
A few ideas to help make this possible…
1. Store up a bank of cash, take profit monthly
If you use a “profit first” model for your company, you already understand the benefits of prioritizing profitability and building a bank of cash for your business. The good news is that you can adjust this model to pay yourself profits as well.
Take a % of profits and build a safety net – I think an ideal amount is three years of cash, but I know that is a big push to get to, you could store more or less depending on your situation.
This will not only give you a buffer period before now and your next thing, but it will also let you “angel invest in yourself” if you want to start a new company right away.
Three years of cash will mentally help you relax and zoom out to play the long game.
Note: Be wary of putting that cash *back* into the business, using it like credit without a clear method for building back up your safety net. This is best done when you have a clear vision for ROI, not when you’re trying to save a sinking ship.
2. Sell a % of your business
Another option is getting some liquidity and selling a chunk of equity for cash. You could sell to partners in your business or investors, and this kind of sale is possible for a venture backed or bootstrapped business.
Before you do this, you need to carefully consider the partners who are buying in, discuss the risks of investment with them (and potential scenarios moving forward), and clarify what might be expected from them as investors. This is the route I took in 2019, gaining a safety net for myself by selling equity to partners, along with the step below, hiring operators.
3. Hire operators, GMs, or CEO’s
Part of an entrepreneur’s safety net isn’t just capital, but people. If you don’t have people you can rely on in bad times, or if you need time off for family emergencies, burnout, or whatever else might come up, then your business will always be at risk, be it big or small, because it solely relies on you.
Hiring a competent GM, COO, or CEO, who has built enough trust over time to give selective access to important information in your business, is key.
Note 1: Not to be paranoid, but it’s worth backing up everything you own data wise in your business to your own computer, as well as using password managers and delegated access to important accounts. Trust goes a long way, but it’s smart to always keep all necessary records for yourself.
Note 2: I’ve never used disability insurance, but this is something else to look into in case you get injured and can’t work.
4. Diversify your capital
Of course, investing is a crucial part of diversifying your risk. Many entrepreneurs look to angel investing as a form of diversifying their capital, but it’s worth noting that angel investing is farther out the risk curve than investing in yourself, because it’s an investment you can’t control that comes with a long lockup period. So, I would consider not just thinking about angel investing – but instead investing in uncorrelated asset classes.
One way to diversify your investments is to give your money to others to allocate for you, for example to a financial advisor. I personally like to do both: invest on my own behalf and allocate to others who have a differentiated view or time frame than I do.
What are you doing to build your entrepreneur safety net?
Anyone with a cash positive business is in a position to start to build an entrepreneur safety net right away. It’s a smart, proactive strategy that your future self will appreciate. While there are stories about entrepreneurs going “all in” and putting all of their capital and life on the line to win big, it’s also the case that many entrepreneurs go all in and end up with nothing. If you’ve got the opportunity to build up a cash cushion, it increases the likelihood of staying in the game.
Through the Cycles of Good and Bad
I think it’s also worth remembering that life comes and goes in cycles. Sometimes there are seasons where everything is working and things feel great. This is the best time to take some of that “goodness” and store it for later, i.e take some capital out and keep it for a rainy day.
Building and entrepenuers safety net can smooth out those cycles for you. So it’s worth considering your future self in the good times.
If you want to talk about your business, taking liquidity, or what to do once you have the capital, get in touch. I’m speaking more with the entrepreneurs I work with about this area.
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