Saturday, September 13, 2014

What would I do if a start-up exit made me a multi-millionaire ?

Of recent interest is that we are starting to hear about successful start-up exits in Singapore. I really enjoyed reading about the interviews with these successful entrepreneurs so I am writing this speculative piece. I think Tech is very much on the rise here and with more talent becoming engineers, we could be hearing about a lot more success stories in the future.

Of course, being a small-time finance author and university student, I don't expect a real start-up multi-millionaire to consult me, I'm merely speculating as to what would I do if I struck such a large jackpot, please please allow me to indulge in this speculative exercise.

Here's what I will do with my multi-million jackpot :

a) Buy a house without a loan.

Maybe these founders already have a home. But I think that the first priority is to clear all housing loans on your primary property. As much as some loans are classified as 'good debt'. Having no loans provide a peaceful state of mind.

We need to distinguish the ability, willingness and need to take risk. As a successful business who already exited, you have the ability and willingness to take on more debt. But in my view, you don't need to do it.

b) Ensure that you have a reasonably risk-free source of passive income.

Once the home is secure, the next step is to ensure that all your basic needs can be provided by passive income. The source of such income can vary, you can buy rental property but I prefer REITs, business trusts and high yielding stocks. A portfolio which yields 5-7% is a reasonable number and can even provide a reasonable amount of growth. You need to determine how much of monthly expenses you have and invest a sizeable portfolio to cover your needs. $1,000,000 at 6% is a pretty solid $60,000 or $5,000 a month.

If you are unsure about how to start, begin with a selection of the largest blue chip companies in Singapore or an index ETF.

c) Get yourself educated financially.

I think this is where my advice is the most unconventional. I think start-up successes are very confident individuals and many of them want to jump into becoming a venture capitalist. I think that is not a good decision. Start-up founders should be aware of how risky tech investing is and they need to account for the fact that their success may make them over-confident in their assessment of these tech businesses.

Once your basic needs are met, the next step is a solid and rigorous financial education. You need the knowledge to cope when your private banker or financial advisor throw you a curve ball. As such, an 18 month investment for a Masters in Applied Finance in SMU is a really cheap buy if you can rack up a high GMAT score. Private bankers won't teach you about option greeks, free-cash flow,  bond duration and convexity, but the good folks in SMU would.

I think that we should trust the bankers and financial advisors who try to give us advice. Bankers want you to keep your money with them, so they would prefer that you keep your risk low rather than you getting your high returns. I noticed that many HNW guys have a really conventional and low yielding blue chip portfolio - bankers just want to keep their businesses, they won't risk their capital. Financial advisers are worse - they only care about commissions.

If you want to take more risk, the only way is to educate yourself and eat your own dog-food.  

So this is all I have for now. In many of these articles on the successful exits, I think there is too much emphasis on jumping back into the tech world with guns blazing and venture capital funding. Perhaps it might be better to take steps to secure your victory and ensure that your family is looked after for life, then take steps to cope with the complexities of finance.

I'm fairly sure that the financial models you learn can be used to value your future investment into that start-up that will change the world.

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