The Investor’s Approach to Entrepreneurship
Guest Post By: Edward DeAngelis
Entrepreneurs, we’re told, are more comfortable with risk than the general population. They have to be, since half of all new businesses fail within five years of their creation. But when we talk about risk, it’s important to understand that risk exists in varying degrees.
How Are Entrepreneurs Like Investors?
Investing well is all about managing your risk to gain the greatest upside. Some investors prefer the slow-and-steady approach of bonds, index funds, or real estate ownership, which is likely to bring you to zero, but it isn’t going to make you millions any time soon.
Others will invest like venture capitalists in riskier ventures with higher upside. Venture capitalists accept the likelihood of many of their investments failing, in exchange for the potential to make many times their investment in a successful startup. Facebook’s earliest backers are all billionaires now, but Facebook was far from their only investment. The others just didn’t turn out as well.
How does this all tie back to entrepreneurship? More importantly, how does all of this tie into being an investor, and thinking like an investor when you approach entrepreneurship?
Most entrepreneurs are the ultimate venture capitalists, plunging a significant part of their savings into a single business idea, one they’ll have to create and build from the ground up. Starting a brand new business can combine the worst elements of both risk extremes -- the likely risk and the catastrophic risk. Even odds to lose everything. It takes something special to shoulder that risk, which is why entrepreneurs make up only about 4% of the U.S. labor force.
But for more conservative entrepreneurs, there’s another option: buying a business. Some of the world’s best entrepreneurs have built their empires this way. Warren Buffett, for example, famously built Berkshire Hathaway into one of the world’s largest companies through a savvy combination of stock-market investing and outright business acquisitions. His holdings now include businesses in such diverse niches as confections (See’s Candies), homebuilding (Clayton Homes), and railroads (Burlington Northern Santa Fe). It took him decades to get to the point where Berkshire could buy railroads outright, but if you start early and play a savvy long game, you might someday become the next Warren Buffett.
Entrepreneurship the Warren Buffett Way
When you buy an existing business, you’re paying for a business idea that’s been battle-tested and has been proven to work. At least, that’s the goal. These transactions can often cost six figures or more, so due diligence, including a thorough review of the business’ financial records, is clearly essential to validating the business before you buy it. When you decide to buy an existing and provably profitable business, you greatly reduce the risk of going to zero.
There are plenty of ways to validate an existing business before you buy it. You’re already on the site of a company dedicated to helping entrepreneurs buy and sell businesses, so any enterprise you find through Raincatcher will undoubtedly be thoroughly vetted and worth further investigation.
There’s a catch to this approach, however. Most entrepreneurs, particularly when they’re just starting new businesses, don’t need to invest hundreds of thousands of dollars right away. But that’s also because most startup entrepreneurs don’t actually have hundreds of thousands of dollars available -- as mentioned before, a six-figure sale price is more a floor than a ceiling when you’re looking at a business acquisition. If you’re trying to venture into entrepreneurship by buying your first business, rather than starting it from the ground up, you might not have the liquid assets to do so.
Funding Your Way To Success
This is where business loans and other forms of business financing can come in handy. There are multiple options for financing a business acquisition, including borrowing from banks, family members, an alternative lender, or even using your retirement accounts as seed capital. Check out the link above to better understand these four options and to determine which might be right for your situation.
The right form of funding will provide the capital you need to buy the business you want, and it’ll offer interest rates and repayment schedules that work with you as you work to expand your new investment. Sometimes, borrowed capital is simply the best way to build your business empire. Even Warren Buffett has made extensive use of debt and leverage to buy the right companies at the right times.
About the Author: Edward DeAngelis is the founder and CEO of Amerifi, a leading alternative lender based in suburban Philadelphia. He’s been an entrepreneur for nearly three decades, and since 2013, he’s helped hundreds of small businesses across America grow by securing them a combined total of more than $150 million in funding.