After selling a successful business many entrepreneurs miss the excitement and challenge of running the show and are tempted to start over again. But is it wise to plough your hard-won money back into a risky venture?
Martin Brown, of SME growth advisor Elephants Child, says: “Just because you did well once doesn’t mean you can do it repeatedly. Don’t get carried away with making deals but consider all the steps you need to take strategically, clearly and always with commercial nous.
“Beware of your own ego, because previous success doesn’t mean you’ve got the expertise to succeed again. You cannot control everything in the mix – timing and luck are a big part. Many things will have changed very quickly – the market, the economy, technology, customers and clients will have moved on.
Getting carried away
It’s easy to get excited by your new business concept without looking at the hard facts. Don’t just appraise the potential value, carefully assess the fundamentals. What do the numbers say? What does the cashflow, profit and return on investment look like? Is this a good sector to be in and how likely is it that the business will grow?
“If things don’t stack up then it’s high risk and you have to decide if you’re prepared to gamble,” advises Martin.
You also need to be aware of cognitive bias, which involves errors in thinking that influence how we make decisions, explains Martin. In business it can stop you making full and thorough appraisals.
“It shapes your thinking and can create blind spots making you complacent and your due diligence less rigorous. Be aware of your cognitive bias or you could be in for a hard fall – ensure you ‘re-set’ yourself from the off.”
Finding good advisers
With a lot of money to invest from your exit and possibly a sense of judgement that needs fine tuning, surrounding yourself with people who are prepared to challenge you, to say ‘no’ and point out risk, is wise.
“Form a trusted inner circle of people you can take counsel from, like non-executive directors, peers, accountants, tax and business advisors,” Martin says. “They’ll help you apply the business rigour you need.”
He argues: “Ideally, investing in a new business should be part of a wider, balanced portfolio of investments. So, only set aside money you can afford to lose in a new venture and be mentally prepared to lose it.”
Take the example of entrepreneur Marc Trup, co-founder of successful cloud-based online property management platform and app Arthur Online.
Having founded a successful dentistry business in 1988 he sold it to BUPA and in 2000 co-founded a video-based educational delivery network for dentists – but the third-party video platform it was based on didn’t launch.
Marc didn’t lose money because the majority investment was underwritten by another organisation. Furthermore, he’d shared the risk with co-founders, a lesson he took on board when launching Arthur Online.
“Starting new businesses always carries risk, it’s inescapable. For me, it’s a better bet to reduce your exposure by owning a smaller piece of a big pie, than a big piece of small one”.
Best of both worlds
Martin concludes: “Those who want the intellectual stimulation of running a business with lower risk can also invest some of their money in a business angel network.”
“Your money is invested across a range of businesses whose boards you sit on as a non-executive director, so you get to run ventures again with less of a gamble.”