Should you start a business or invest your money?

Maybe you had this thought before – you have a sum of money and you wanted to grow it. You were wondering whether to start a business with this capital or to invest it instead.

The common perception is that business and investment go hand-in-hand and are akin to identical twins. Hence, some individuals can get confused about which path to take as though they are similar.

I have been an investor and an entrepreneur and I can tell you they are poles apart. A good investor is often not a good entrepreneur and vice versa. The choice should be so obvious that you should not even be in a dilemma. Let me explain the differences.

Entrepreneurs are definite optimists while investors are indefinite optimists

Borrowing Peter Thiel’s terms of definite optimists and indefinite optimists (from his book Zero to One).

As definite optimists, entrepreneurs believe that they are able to plan, execute and change the world. To make a better future, they must do something about it and they have the ability to influence the outcome. They feel that they have more control than an investor. You can call it overconfidence but it is a necessary ingredient found in successful entrepreneurs. Else, why would they even test the extremely low chance of business success?

As indefinite optimists, investors accept that the market is random and one should operate with prudence. There are many things out of their control. They can’t force the market to give them the returns they want, and at the time they want. They can only get what the market is willing to give and they are patient about it. They also understand that it is the management of the companies that they have entrusted to run the businesses, and that they have little to no say how the management should run it. But they are still optimists, believing that the future would bring positive returns to their investments. Otherwise they wouldn’t even be investing.

Entrepreneurs tend not to do well in investments when they bring over their business mentality to investing. They would approach the financial markets as something determinate, and that they have control over the outcome. They are competitive and want to win. They believe they just need to put in effort in the right areas to get a return they want. They believe they can crack the code and master the markets.

Investors would also suffer when they use the same mindset towards running a business. They begin with a lower sense of control. They believe that no matter what they do, there’s an element of luck involved and many things are outside of their control. They will just accept the ‘fate’ if things eventually don’t go their way. They wouldn’t put up a stronger fight to overcome the challenges.

Hence, running a business and investing are very different. Ask yourself are you closer to a definite or indefinite optimist.

Entrepreneurs have to tolerate a lot more risks than investors

Most people are concerned about the high rate of failure when it comes to starting a business. You know the proverbial saying, ‘most businesses fail’, and this would scare most of the people to not do it.

There are few entrepreneurs in any population because the majority are risk averse for good reasons. We cannot afford everyone to take risk to become entrepreneurs and we also cannot afford everyone to play it safe. Our non-uniform DNA to risk-taking has worked well for society, as if God or evolution had chosen to diversify into different individuals to balance progress and stability.

Entrepreneurs often have high opportunity costs. They can be working in high-paying jobs before leaving lucrative careers to start a venture. They often have to risk their own capital as well. They also have to put up personal guarantees if they need to take up loans. Monetary risk aside, they also have to throw in countless hours and taking time away from their family is something they have to willingly sacrifice for the business. Not to mention emotional stresses and mental drains. And entrepreneurs gave all these with the possibility of receiving nothing in return. Or worse, end up in debt and affect the entire family when the business fails miserably.

Recently I picked up a quote from Taylor Pearson,

People starting businesses tend to assume that losing everything is a real possibility. 

People investing in the stock market generally do not.

The Interesting Times: Reality Has a Surprising Amount of Detail by Taylor Pearson, 10 Apr 2020

This is very true as I find that people tend to believe investing is lower risk than starting a business because they believe they cannot lose everything in an investment.

That is not true. There have been countless cases with investors losing their entire capital in frauds and trading on margins. It is the expectation of ‘nothing bad will happen to me’ that often do them in eventually.

However, it is true investing tends to be safer if we discount the excess risk-taking activities such as betting on one stock or taking high leverage. One can definitely manage investment risks and a favourite way is to diversify into different asset classes and have more securities in a portfolio. Entrepreneurs on the other hand will not be able to diversify into different business streams at once. There ain’t enough hours even for one business.

Investors can also keep their high-paying careers and only invest what they have saved from their salaries. Part-time entrepreneurs rarely succeed on the other hand.

Therefore, ask yourself if you are able to take the risks of an entrepreneur. Otherwise, invest prudently.

Entrepreneurs often go beyond monetary reward

Investors usually have one focus and that is to make a good return from their investments. They seek monetary reward more than anything else.

Entrepreneurs love huge monetary reward too but often they have more than this one objective to strive for.

Some of them love solving problems. It excites them and kick them into action. They find it fulfilling to be able to be useful and solve problems for the society.

Some of them are passionate about something and want to bring an idea into fruition.

Some of them like to deal with people and leading a team to achieve goals gives them a sense of camaraderie and belonging.

Most of them would find satisfaction about themselves building a viable business and growing it overtime. Having achievements to show gives a sense of accomplishment in life.

Hence, if you are the opposite of the above or do not have such aspirations, you should be an investor instead.

Conclusion

Entrepreneurs and investors are made differently and hence it should be easy to identify which mould you belong to.

If you believe you can shape the future, inspired to solve problems, being obsessive about it 24/7, love dealing with people, enjoy growing your team, start a business.

If you do not believe you have the ability to shape the future, prefer solidarity, love reading and thinking about the world affairs, not having to deal too much with other people, invest your money.

Regardless which you choose to be, all the best!