If I think back to why I started my first company, and you made me narrow it down to one reason, I’d say that it was to create freedom.
I wanted the freedom to live life on my own terms– to travel when I wanted, to open doors to rooms closed to most, to control my schedule and spend time with the people I loved, to see places and experience things most would only dream of, to play the game of life at the highest levels.
I imagine if I asked most of you, the answer would fall somewhere in the freedom category. How do I know? Over the years, I’ve asked this question to hundreds of founders, and almost all of them eventually distill their answers to some form of freedom.
This kind of freedom, unfortunately, requires money.
So we start companies. We take big risks, we bet on ourselves, and when things get tough and others would quit, we push through.
And at some point, if we are lucky enough and diligent enough, we start to see the fruits of our labor. We have become profitable, and we have more than enough money coming in to cover our expenses.
But this creates a whole new set of challenges. What do we actually do with that money? How do we use it to build the life that we set out to create in the first place?
If you are like me, you look to those who have come before. We start doing the things that we think other wealthy people are doing in hopes that we will have similar outcomes.
They say the average millionaire has seven streams of income.
So, we go about looking for ways to create more income streams. We have our primary business, which is working well enough, but we are told that we need more. Maybe we decide to build a real estate portfolio, become an angel investor, or try our hand at day trading crypto.
Or, if you are anything like me, you might choose all of the above and a few more for good measure.
The idea is that if we spread our money between multiple ventures and take enough risk, they will eventually create the seven streams of income that will carry us into the proverbial sunset of financial freedom.
The problem is that the idea of seven streams, while appealing and perhaps even seemingly logical, is a myth.
While it is often repeated, no one really knows where it came from. There is no study, research, or place to attribute this axiom we accept for truth…
Perhaps it was popularized by Robert Allen’s book Multiple Streams of Income. Another possible source is Tom Corley, who did a five-year study on wealthy individuals and wrote a book called Rich Habits.
However, rather than seven, here is what Tom found when it comes to the streams of income millionaires actually have:
- 65% had three streams of income
- 45% had four streams of income
- 29% had five or more streams of income
So why does this matter? Who cares how many income streams rich people have? Isn’t more better, end of story?
I would argue that this myth has created untold damage when it comes to entrepreneurs’ path to building financial freedom.
Trying to create multiple income streams leads us to invest in ventures outside our expertise. When we start multiple companies or invest in many different areas, most of us will eventually find that the further away we get from our primary expertise, the more likely we are to lose money.
In chasing outsized returns, we invest in high-risk, high-reward ventures. We take the money we’ve made by taking risks and betting on ourselves and then go out and risk it again by betting on new and exotic deals.
Boring old index funds? Not for me, sir. I’m an entrepreneur, ahead of the curve; I have access to information; I have inside knowledge! I can beat the market; if I can, I would be irresponsible not to take advantage of my position!
The problem is that many of the alternative investments we can access as entrepreneurs are illiquid. Sure, we might be able to invest in the next unicorn, but it’ll take 5-10 years before we can even consider accessing that money.
It turns out that as alluring as the idea of illiquid investments outperforming boring ones is, it is also untrue. The idea that illiquid assets outperform liquid investments is most likely the result of cherry-picked data and self-reporting by fund managers.
Instead of investing our hard-earned money in whatever deal comes across our desk in hopes of diversification, my journey as a professional investor for over a decade has led me to an opposite conclusion.
The fact is, if you have a primary business that has the capacity to continue to grow, you already have the best vehicle available to generate outsized returns.
The most efficient way to reach financial freedom is to use your capital (and time resources) to reinvest and grow your primary business.
My definition of true financial freedom is when one’s assets generate enough cash flow to cover spending for the rest of their life.
The problem is that achieving this requires a certain amount of liquidity. I call this number “escape velocity”.
Every time we lose money on a failed investment, we sabotage our path to freedom.
As a mentor of mine says, “Don’t risk it twice.”
That’s why I’ve spent the past few years post-exit rebuilding my portfolio to reflect the playbook I wish I had when I was going through all of this the first time.
I’m not one to ruminate on the decisions or mistakes of the past. I try to take the lessons I learned, integrate them, and move forward.
But there was a moment in time, right after I sold my company, that I would love to take back. I could have invested that lump sum smartly (with a wealth manager’s help) into a fixed-income portfolio that would have covered my spending for the rest of my life with little to no risk.
Then, once lifetime spending was covered, with the next dollar above my reserve, I could swing for the fences and take as much risk as I liked.
Instead, I put it all back in the middle. I made some great investments, some terrible ones, and some whose outcomes we won’t know for quite some time.
But once I started deploying my capital, I no longer had the opportunity to cement a risk-free lifestyle.
I’ve finally built the playbook I wish that someone had given me. I didn’t know the first thing about fixed income, and I certainly didn’t understand how professional investors think about risk management.
Nowadays, I’m committed to rebalancing. I’m proud to say that I’ve been illiquid investment-free since 2021. I still have plenty of illiquid investments, and as they pay out, piece by piece, I rebuild my portfolio for safety and longevity. I’ve said no to some investments that I genuinely believe are once in a lifetime. But the fact is, the only investment I need is the one that I only have to make once in my lifetime– and that keeps paying me forever.
So whether you’re just starting to hit the growth curve and bank some cash or inking a deal to exit, I’d urge you to consider that what got you here won’t get you where you need to go.
Perhaps take it from a guy who’s had a wild ride – and would love nothing more than to allow you to learn from me so you don’t have to learn the hard way.
To your freedom,
mb
