Three Rules-of-Thumb From Successful Entrepreneurs

Three interesting rules-of-thumb were discussed among a group of entrepreneurs I met with recently.

I found the points interesting at the time but now that a few weeks have passed I've found myself either mentally referencing them or mentioning them to others frequently enough to justify taking a second to write them down in a place where they might be shared with others.

The first concept which I really loved was in reference to how entrepreneurs (although appropriate to literally everyone) build and maintain wealth and I found it to be very true of the paths I've seen other people succeed along. It was said that you build wealth by taking the most valuable resources you have (your intelligence, connections, unique skills and talents, physical resources, time, money, etc) and bringing them together to focus on a single effort and that you maintain wealth by taking the most valuable resources you have and spreading them as far apart from each other as you can.

That's fascinating to me. If this is true it implies that the old saying "don't put all of your eggs in one basket" might apply well to people maintaining wealth but in the case of entrepreneurs trying to build wealth it might be the reason for their failure. I certainly agree that success in a startup is about focus and pooling every resource you have, because in the beginning money is low and available time is high.

The second concept was more simple but was meant to provide a framework for thinking of milestones in wealth creation. It's very interesting to me because my original goal in starting a number of startups previously was to build a company to $1M (M = million dollars) in annual sales.

When you're in your late-teens this seems like the mark of success no matter how you slice it, and at that age it probably is. It was said that the 2-10-100 million dollar rule applies. I'll explain.

At $2M of personal net worth you have enough money to not worry about money again and to probably not have to work if you don't want to. At $10M of personal net worth you're considered wealthy and you can pretty much do whatever you want to. You also have enough money to comfortably leave behind enough for the next few generations in trusts, etc. At $100M you basically cross the threshold where your available financial resources exceed any normal person's ability to spend cash in a lifetime by so much that you will basically need to spend your time trying to figure out the best ways to give the money away.

Which you better be doing a lot of if you have this much money! I thought this perspective into what drives people with these higher levels of wealth was very interesting and very much in line with the few people that I know that have reached these levels of financial success. Also to note, the $2M first mark was recently increased from $1M due to inflation according to the person who told me this.

The third concept was put much more simply than the rest. It was said that "the best time to sell your company is when someone offers to buy it." This brief and comical statement probably rings true with many entrepreneurs who own private companies whose stock is worth as much as monopoly money (my preferred term for it) until a reasonable buyer comes along and declares a dollar amount he would be willing to purchase the company for.

It's a truly odd situation when you're in it. I'll add to this a great story told to me by a successful entrepreneur about 24 months ago. He was advising a friend on the possible sale of his business and the friend posed the situation to him that he wasn't sure if he was ready to sell his company and that a prospective buyer had offered him $10M for the business when he was absolutely sure the business was worth at least $20M. My friend asked his friend a great question which was this, if you had that $10M in cash right now instead of your business, how would you invest it?

After little pause he responded that he would put some of the money into the stock market, would save some of it in a trust for his children, and would put a bunch of it in low-risk bonds and other safe financial vehicles and then would probably put 10% of it back into the business to see where it could go in the future.

What my friend then explained to him was that conceptually if he decided not to sell the business for $10M he was also at the same time making the decision to reinvest all 100% of his $10M (currently available to him in cash through a sale) back into the business. The point immediately made was that a reasonable person is perfectly capable of determining an appropriately risk averse portfolio for their cash investments but that entrepreneurs for a variety of reasons (the pride of parenting the business, the emotional commitment, the pattern of work they've come to love, etc) can easily make very poor financial decisions regarding the equity they own in their businesses.

In this case the entrepreneur had become so focused on putting all of his resources into growing his business that he lost sight of his responsibility to protect the wealth he had so far created by spreading his bets wide and far (back to concept number one). I love the concept and completely understand how this can happen in the heads-down world of high-growth startups.

I hope these morsels of thought are valuable to you and that you might easily navigate the course of building a successful company while not forgetting to take care of yourself along the way. Good news though, it's a fun ride and in the world of fast-paced technology companies there is always time to learn from your mistakes. Happy business building!