There are fundamental differences in the way investors and entrepreneurs think about the world of investment. Delve into the workings of an entrepreneurial mindset and leave with some precious insights and investment ideas.
Open any dictionary and look up the definition of “investor”. This is more or less what you will find: A person that puts money into financial schemes, property, etc. with the expectation of a future financial return or profit.
“Put money and expect” —that has always sounded to me like an easy job. OK, you need money and investment opportunities, but everyday financial markets provide exciting stories, compelling opportunities, and promises of returns to those who study and examine them. And this is regardless of the size of the investor’s portfolio and level of expertise.
Of course, the job of an investor is not that easy, as not all investments deliver returns —at least positive ones!.
A successful investor is one who is capable of analysing investments, forming sound expectations of future returns, and assuming decisions. However, my point is that this job is all about expectations. Put money and expect.
What happens on the other side of the markets, before you put your money and while you expect, is however, a completely different reality.
Whenever I find myself carried away by the sirens of markets, I like to remind myself of this quote from Paul Bouchey that I read once in a financial magazine: “Most advisers and investors forget that the capital markets were not created to provide them returns. The capital markets were created to give money to businesses and entrepreneurs to drive the economy and to offload risk onto investors. And it does a wonderful job at that.”
There is a rich source of lessons to be learned here.
Investors focus on the aims, entrepreneurs, on the trajectory
As investors, we tend to focus on one of the aims: the company’s growth. This, in return, should ensure potential profits for us.
It is also one of the goals of the entrepreneurs, but certainly not the only one.
For businesses, growth is not all about future returns. It is first and foremost a journey made of strategic choices that have a lot of consequences at different points in time for the company, its employees, its customers, the markets it covers and the environment it operates in.
Investors and entrepreneurs also think on different time scales.
Investor expectations are often bounded in time, while entrepreneurs are thinking longer term. An investment is an agreement reached at one point in time between investors and businesses, but their underlying or long-term interests may not be fully aligned. If you need proof of this, I would encourage you to join a shareholder meeting once in your lifetime.
An interesting fact is that these disconnections have encouraged the emergence of funding alternatives for companies: Business angels, private equity, P2P (crowdfunding, crowd giving, crowd lending), etc. There is today a greater focus on the convergence of investor and entrepreneur interests, on the face of it at least.
What should be the takeaway here for aspiring investors? Before calibrating your expectations, try to gain a holistic picture of the company and its potential trajectory. Understanding the business owners’ past decisions and future vision is critical. Many great investors such as Warren Buffet have put the relationship with company management at the centre of their investment philosophy.
Before sharing potential returns, you share risks
When you invest, your money literally embarks on the company’s journey and you become one of the first risk-bearers alongside the entrepreneurs.
That’s why risk is such a central notion in finance: You accept the risks and uncertainties associated with an investment in the hope that you will be rewarded.
Assessing the risks of an investment is not an easy task, but it is an important one. There are the “known” risks and the “unknown” risks. More often than not, it is the latter that will jeopardize your investments and cast doubt on your investment strategy.
One of the hardest parts of investing is not actually making the decision to invest, but what follows. We make a decision to invest and we form an expectation at some point in time. From that point in time, this expectation will be challenged every day by reality.
The investment can drop significantly in value one day on the back of bad news, or its price can jump all of a sudden without explanations. It is also possible that nothing happens for a long period of time. Our assumptions and nerves get constantly tested by the market, peers, etc. The fact is that while we expect, many things can happen.
There are ways to mitigate the discrepancy between our expectations and the events that unfold, or at least to deal with our gut reactions. But risks are inevitable. Financial markets were precisely created to transfer risks from entrepreneurs to investors.
Interested to learn more about risk? Read our article “About the risk of not taking a risk“.
You also share responsibilities
“Put money and expect”. Even if everything goes as planned and your money gets returned with additional profit, you may not have enjoyed the experience.
Driving businesses and economies sometimes implies that entrepreneurs must make difficult decisions, or at least decisions that are not necessarily aligned with your set of values.
As an investor, you might indirectly put additional pressure on these decisions to be taken, as not honouring the financial expectations of investors sometimes has more consequences for companies than firing employees. Not to mention the scandals that can occur. It does not feel great to see a company you believed in, and are associated with, make newspaper headlines for the wrong reasons.
There is a big focus nowadays on responsible investing, transparency, corporate responsibility, etc. While this could potentially lead to a better financial world, some argue it comes at the detriment of potential returns.
We will leave this debate for another day. The point of this article is about investing in businesses aligned with your values —be it ethical, familial, religious, philosophical, etc.— and a fortiori if these values are important to you.
Investing is much more than putting money and expecting
Whether you want it or not, when investing, you bet on a business, and share its risks and responsibilities. While it can feel overwhelming, there is also something exciting about it: Your investments, even the smallest, can help drive the economy.
That’s why, when investing, it is important to bridge that gap, to go on the other side of the markets, and to think as an entrepreneur to form better expectations.
If you don’t know where to start, here is a simple exercise I like to do when considering an investment: Try to picture where a single dollar you could put would go before coming back to you. If you don’t like the journey, save your dollars for the next investment opportunity!
Not sure if you are ready to start investing yet? Take a look at our insightful Kickstarter Guide.
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