Great entrepreneur, terrible investor

As part of Financial Planning Week, we spoke to some of the UK’s top entrepreneurs and financial planners to find out how business owners can better manage their wealth. 

Here’s what we heard:

1. Being a good entrepreneur doesn’t make you a good investor

“You would imagine that anyone would be happy if their first ever significant participation in an early-stage funding round had been with Betfair,” says Mark Davies, part of the founder-manager team at Betfair. “Seed investors bought in at £1, and there was a 10:1 share split before Softbank took a 23 per cent stake in 2006, giving those who got out at that point a 132x return on their cash.”

But luck, he says, runs out: “Every subsequent investment over the period of a good few years was a complete disaster. It’s unsurprising: my approach had been so successful the first time that I merely re-adopted it whenever anyone put an idea in front of me. If I liked it, I invested. It took me a while to realise that the product is less than the half of it: timing, people, and external risk factors are all so much more important.”

Davies now does the majority of his investing through the Octopus Venture Partners. He works with the team there to review, support and invest in promising early-stage businesses. “I provide input and advice and, in return, get access to the deal-flow, due diligence, and management of potential investments, leaving me with a narrower field to decide which companies to support.”

2. Plan for the markets, don’t play them

Andrew Reeves, director of The Investment Coach, says business owners trip up on investments by having all their eggs in one basket. “It is tempting to feel you have an edge against the market in ‘your area’ but most markets are heavily researched and traded. Opt for a diversified portfolio.”

3. Build wealth outside your business

“One problem with investing everything in your own business is that it is a huge bet. If it fails, there is nothing to fall back on,” says David Crozier, managing director of Navigator Financial Planning. 

Even if your business performs amazingly well, keeping all your wealth tied up in it means that, should you pass it onto your children, you’ll continue to be a drain on the business (through drawing dividends) while your children try to run it. 

4. Plan ahead for inheritance and tax

Start estate planning immediately advises Jason Holmes, director at Lumen Financial Planning. Consider making or updating a will, how you will sell or pass on your business, providing for your family in the event of your death, and the use of trusts for tax planning purposes.

Adam Price is the founder of VouchedFor.co.uk – a startup which lets you find, rate and review financial advisers. It is currently running a series of guest blogs about financial advice for entrepreneurs.

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