Founders need to understand that businesses should be seen as investments first and start-up enterprises second. At the end of the day, a business can only survive if it makes money. What makes a good investment will change depending on the nature of a business. With consumer product businesses, there is a heavy initial outlay to purchase stock. This stock is then stored and sold over time for a profit. A very high risk-tolerance is required to engage in this business strategy. When money is invested in product stock, there is no way of recovering a single dollar until some of that stock is sold. When someone purchases shares in a publicly traded company, they aren’t exposed to the same level of risk. If the share price drops 15% overnight, they will lose 15% of their investment only if they choose to sell out of their position then and there. If they stay in their position, there is a very good chance that the price will return to the purchase price and move beyond that point in the future. As a business, when you spend $20,000 on product stock, you are down $20,000. You could stand to make $180,000 from your $20,000 in stock, which is a far greater return than many equity investments. However, there’s far greater risk involved. Depending on the variable costs associated with selling that stock and any other operating expenses, you may need to sell $50,000 worth of stock to break even on that $20,000 investment. So, while the unit price may seem attractive, the deal is only incredible if you are able to sell all of the stock. I choose to look at it in very simple terms. If I spend $10,000 buying 5,000 units of tea, my per unit price is $10,000 after I sell one unit. After I sell two units, the per unit price drops to $5,000 per unit. After I sell 10 units, the price is now $1,000 per unit, and so on. It is not until each and every unit is sold that the price is truly $2 per unit. This is the trap with consumer products. A business will only get the advertised unit price if they are able to sell each and every unit of stock.
Despite the risks involved, the potential returns from consumer product businesses are far greater than most people can expect from other types of accessible investments. Potential returns are usually pegged to relative levels of risk. Low yield options (like leaving money in a bank) have a safer risk profile, but the returns are generally in the 1-3% range. The rates are so low because, along with the strong safety profile, the returns are passive: you don’t have to do anything. You just put your money in a bank account and every month you will be paid out interest. On the other end of the risk spectrum, you can sell consumer products and comfortably make 200-300% returns. The risk is, of course, that nothing is guaranteed and selling stock is a lot of work. If I leave $20,000 in a bank account for a year at 3% interest, I can expect a pre-tax profit of $600 at the end of that year. If, however, I spend $20,000 on product stock, I could walk away with any amount between negative $20,000 and $100,000 (depending on sales price and margins).
A big part of focusing on business as an investment, rather than a start-up is knowing not to compare your business income to what you would be making in a job. Comparative income levels don’t matter. What matters is your relative return on investment. If you can invest $20,000 and walk away at the end of the financial year with $40,000 in profit, plus your initial investment, you have made a 200% return — an excellent outcome by anyone’s metrics of success. If you are worried about the fact that you could be making $70,000 per year in a job and you only made $40,000 in business, you have the wrong mind-set. Focus on the returns relative to the true financial risks that have been taken. If you want more money, it may require a greater financial risk exposure in the future. Fortunately, I didn’t have to worry about making more money as a lawyer. My starting salary at a top law firm was NZ$42,000 and the pay scale progression in law in New Zealand is slow. In my first year, I had almost no disposable income after student loan repayments, taxes, superannuation payments, living expenses, daily travel, and miscellaneous work expenses. The promise of career progression and greater pay down the line is meant to keep young lawyers hungry. Figuratively? Literally? I don’t know.
The following day, I made my way to IFC shopping centre to look for a new laptop. It was the first time I had had any downtime to reflect on the previous 48 hours. I had left pre-packaged bags of tea with a friend back in New Zealand who was sending out orders while I was away. As I sat down for a coffee at the Simplylife eatery, I had a moment of introspection that has always stuck with me: “Isn’t it amazing that I have made $300 today and done absolutely no work?” It was my first taste of passive income and automation in business — albeit on a micro scale. The idea went against everything I had ever been told about how society worked. I had become so used to the idea that making money had to be a struggle. Like most people, I grew up in a household where money was a constant issue. It was the source of most arguments between my parents and bubbled away just beneath the surface of every interaction they had with each other. What if it didn’t need to be a struggle? What if I didn’t need to be chained to a desk to make money? What if there was an easier way?
In life, we can only be what we can see. If we aren’t exposed to different ways of thinking and different ways of making money, how can we expect to take a different path to the one set out by our parents? I wanted to be a lawyer because I knew about lawyers from television shows. If I hadn’t been exposed to law, I couldn’t have gone down that path. For me, starting a small business was the exception to the rule. I had never met someone who had left their job to pursue business. Almost every person I knew talked about it, but no-one had actually done anything. What did “normal” look like for a small business owner? Was it normal to make money in this way? Was it normal to travel to China to find a supplier? I had no idea. I didn’t have a mentor to follow. I only knew that I didn’t want the alternative. I didn’t want a conventional job. I didn’t want to sit at a desk all my life doing work that didn’t matter, with people I didn’t like, for an employer that didn’t care. I chose sanity over security.
In many ways, office-based employment is a warped social experiment. We have strained interactions with complete strangers we pretend to like and care about at the expense of real relationships with friends and family. Over time, our personalities homogenise as we identify and share experiences with our colleagues. We trick ourselves into thinking that we like work and we like the people we work with. We sacrifice our health and wellbeing and trade away the finite amount of time we have on this earth for a little bit of money. Realistically, I know that it is not that simple. We all need to make a living and work is a necessary evil. It’s easy to have some throw-away line, like you should pursue your passion or find a mentor or search for meaning in your work. That’s all great in theory, but in reality, we are restricted in what we can do by a myriad of things, from family circumstances and place of birth to skin colour and gender. Those restrictions have made me question how we view fame and wealth: we shouldn’t look up to people who have money, just as we shouldn’t look down on people who don’t. Not all people are created equal and not all opportunities are the same. Life can’t be summarised on a stat sheet. You can’t judge someone’s life until you know that person’s story.
We shouldn’t look up to people who have money, just as we shouldn’t look down on people who don’t
We give up our autonomy for a pay check that gives us just enough money to live outside of work hours, but not enough money that we can ever leave. I don’t think most employees realise just how fragile their lives truly are. We can go out drinking on Friday night and go out to dinner once a week and go on vacation once a year. We can pay a mortgage and buy clothes and show off our new car to friends. But, at what cost? We spend money thinking that we can always make more. What if we get sick or someone close to us dies or we experience another kind of hardship? An employer isn’t going to care. As a society, we focus too much on superficial and temporary gains at the expense of long-term stability. We shouldn’t spend money like we are going to work until retirement. We should save and invest money, so we don’t have to. The goal in life is financial independence.
We spend money thinking that we can always make more
My cynical view of conventional employment came about because of something I witnessed early on in my working career. A few months into my first real job, a partner, who I had a lot of respect for, had a heart attack one night and died. He was 37. I suspect his death can be put down to a combination of work-related exhaustion and a genetic predisposition to heart disease. He died on a Sunday. On Monday, everyone in the office was in shock. He was charismatic and well liked. He was different from everyone else. He had managed to retain his personality, despite spending his days surrounded by some of the least interesting people on earth. He was slightly overweight but played sports and tried to look after himself. He had chosen to put off having a family to focus on his career. In the hours that followed the announcement of his death, employees openly wept in the halls. It didn’t matter if you had known him for years or a matter of weeks, it didn’t seem fair — he was one of the good ones. At noon, the senior partners stood in the centre of the office and announced that they would be funding a scholarship in his name and would be naming a conference room after him along with a host of other smaller gestures. It felt nice that they were recognising his contribution to the firm. The following day, Tuesday, it was business as usual. I walked into the office expecting to see the same forlorn faces from just 12 hours earlier. Everyone, it seemed, had moved on. The scholarship never materialised. The conference room name didn’t change. His funeral came and went. His “friends,” people who had worked with him for 15 years, never openly spoke about his life or death again.
Two things stood out to me about this incident. Firstly, we are all expendable. The partner who died offered everything to the firm and was involved in almost every part of the business. When he was alive, it felt like the place would have fallen apart if he had taken a few days off. He never went on holiday because he knew how much he was needed. Yet, in death, he was forgotten within 24 hours. The news cycle moved on. While I understand that we can’t spend our lives mourning the loss of someone close to us, we can certainly use it as a learning experience. I couldn’t help but wonder whether the tears shed the day before were real. Did it even happen or were we all just actors playing the part of caring colleagues? How are we meant to act when we hear of someone’s death? Tears seem appropriate, certainly. What else? Empathy? Are prayers the answer? Should we pray to an imaginary God in the hopes that he/she/it will look after him in a non-existent afterlife. That may well make us feel better, but it’s just an escape. Prayers help the living but do nothing to help the dead. It’s a way for us to stop thinking about things we don’t understand. We don’t understand death, but we have created stories that frame it in a way that gives us closure.
It was the reaction to his death that really stuck with me. When I really thought about his death, I realised that I didn’t care anywhere near as much as I should have. I still had to get up the next day and go to work. Life goes on. A big part of life is learning from others’ mistakes. Maybe his mistake was working too hard and not taking care of himself. Some of us get lucky: we have heart attacks and survive. We use these experiences as warning signals that we need to make changes in our lives. His heart attack was my warning signal. I vowed to take better care of myself and eat well and cut down on drinking. I also vowed that I would find meaning in my work. Even if we try to live our lives perfectly, there’s no guarantee that we are going to live until old age. I was conscious of this. If I died at a young age, I wanted to make sure that I didn’t hate the work I was doing and the people I was around.
Being in business forced me to change my thinking. I couldn’t rely on the fact that I was going to make money each day, so I had to adjust my spending accordingly. I only spent money on things that were going to directly or indirectly save money or make money. Spending in this way is necessary until the business is throwing off cash and making enough money to sustain its continued operation and growth. It’s hard for a normal employee to think in this way because they feel like their income is guaranteed. If someone is fired from one job, they can always find another one. If you have seen the toll that a redundancy can take on someone’s life who is in their 50s, you will know how crazy it is to rely on the fact that you will always be employed and that you will always be employable. Every person should be working towards a day where they don’t have to work. This isn’t about getting to a point where you have a few million dollars in your bank account. It’s about getting to a point where your investments continue to make money without additional capital injections. We commonly see this with retirees. Too many people are retiring with fixed savings. It is always better to have a source of income rather than cash. You don’t want one million dollars in cash. You want two $400,000 rental properties generate a few thousand dollars a month in rental income and perhaps $200,000 in the bank. It is always better to focus on creating an income stream rather than worrying about how much money there is in a bank account. A woman who drives a used 2008 Toyota Corolla and owns three rental properties is richer than a man who drives a Mercedes S-Class and rents a property near the beach. It’s important to see through conspicuous spending.
I only spent money on things that were going to directly or indirectly save money or make money