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“Take risks,” they said. When you’re an entrepreneur, you have to bet on yourself and shoot for the stars frequently. But how do you balance this appetite for risk with important personal responsibilities like paying a mortgage or taking care of your family? Too many founders embrace risk without first laying out a safety net, and when the tables turn the results can sometimes be catastrophic.
As the CEO of a travel company, few things could have prepared me for the “Black Swan” event that was Covid-19. As soon as lockdowns went into effect, new customer acquisition immediately plummeted by 90%. We fought hard throughout the year to survive and had to take unprecedented risks to stay afloat.
But as it turns out, a controversial personal finance decision I had made at the start of 2020 gave me peace of mind about the whole situation. The move was inspired by a deal made between Jeff Bezos and a quiet software startup over a decade ago. If you’re eyeing starting your own side hustle or business — and want to truly position yourself to take the types of stomach-churning risks that reap tremendous rewards — you might want to keep this story in mind.
Balancing risk and reward
In 2006, Jason Fried and David Hansson, the founders of project management software Basecamp, pitched Jeff Bezos to purchase a minority, no-control stake in the company. The startup had already been in business for seven years and was profitable. But one reason they invited Bezos to invest was so they could cash out, ensure financial security for their families and free themselves up to take bigger business risks in the years to come.
Per a blog post on Hansson’s site Signal v. Noise: “What Jason and I got from the deal was the total confidence to go the distance. In 2006, we’d only been running Basecamp for a few years. We’d been besieged by venture capitalists and acquisition sniffers. (Basecamp was) profitable, yes, but modestly so.”
Risk is an everyday part of life for entrepreneurs, and in some cases one wrong decision can send the whole operation up in flames. This option isn’t viable if you have a family to care for, so once my company had racked up enough capital I made money moves that could free up more courage and confidence in the decision-making process.
I took a profit distribution and used this money to purchase five single-family homes in cash, allowing me to diversify my personal income with rental properties. All-cash transactions probably make many a personal finance guru cringe, but the security of knowing that my family would be taken care of if the company ever went under has freed me up to be more fearless with important business decisions. This courage arrived just in time, as pandemic travel restrictions forced us to get creative to keep our travel company open.
This isn’t intended to be a wealth flex, but rather a cautionary tale on what big decisions you need to make once your company actually is successful. Rather than having your business become your life, let your business help you create the life of your dreams.
Related: There Is No Success Without Risk
Building a business that can lead you to financial independence
Obviously, to make moves like this you need to sock away all that profit to begin with. So here are a few tips from nearly 25 years in entrepreneurship that can help you be successful on your journey.
Prioritize profitability. It’s not unusual for Silicon Valley startups to operate at a loss for months or even years before they become profitable. Resist the urge for this to become the norm; find ways to become profitable sooner rather than later and you’ll have an easier time building up reserves that can lead you to financial independence.
Avoid founder fallacies. In his book San Francisco Fallacy: The Ten Fallacies That Make Founders Fail, author and venture capitalist Jonathan Siegel talks about how many startups rely too heavily on making their product perfect, going into business with friends or convincing themselves that failure is not an option. You might be tempted to raise investor capital to work out the kinks, but the reality is that you don’t need a fancy office or lavish parties to get your business off the ground; you need to determine what works and then stay in execution mode.
Take care of your people. Despite plummeting sales, we were able to keep everyone at the company employed and had no layoffs. When you take care of your people through thick and thin, they will also take care of you.
Owning a business is often romanticized, and everyone wants to be the founder or the CEO. Remember that you started because you wanted more freedom for yourself and your loved ones, and that you can potentially create this security sooner rather than later. Take steps to build financial freedom today, and you’ll free yourself up to take the big risks necessary to shoot the moon.