Beyond the big win – how do you protect and grow your wealth?
We’ve all heard the stories of entrepreneurs who succeeded after failure. Less common are the stories of those who failed after succeeding. Heck, I Googled “entrepreneurs who failed AFTER succeeding” and Google returned pages and pages of articles with titles similar to; “How successful entrepreneurs bounce back from failure.” The opposite of what I was searching for.
I know the stories exist because I have met plenty of founders who have shared some version of the following story; “I sold my business for (insert number) hundred million dollars.” They then set up a bit of a family office and invested in other ventures and investments, but torched millions.
Hypothetically, if the entrepreneur had invested their, say, $600 million after tax, in diversified private credit funds, earning, let’s assume, eight per cent, they’d be earning a relatively steady $48 million per year or four million per month before tax.
But that’s just too boring. And hey, they have skill, remember? “I just sold my business for $600 million, so it’s all good.”
Even with advice, it’s not uncommon to spread the money across a whole bunch of global and domestic equity and bond funds, alternatives, and private equity and venture capital investments. But the latter asset classes, which sound sexy – and ‘everyone else is doing it’, frequently prove unproductive while also tying the money up for years in the hope of another moonshot.
The same result is also common when a successful entrepreneur tries their hand at the next business venture.
So why is success less tangible the second or third time around?
It may have everything to do with luck, and the fact that successful entrepreneurs attribute their initial success solely to their own skills and actions, failing to acknowledge the significant role of happenstance or factors outside their control. With a bank account overflowing in cash, the resultant overconfidence causes past strategies to be repeated – ‘if it ain’t broke, don’t fix it’ – without adapting to new contexts, markets, or challenges, ultimately contributing to failure.
Some founders, especially those with a strong ‘internal locus of control,’ may downplay the impact of luck and external factors on their initial success.
As an aside, ‘locus of control’ refers to an individual’s belief about the extent to which they can control events in their life. They might attribute their achievements solely to their own abilities, hard work, and strategic decisions, failing to recognise the role of unforeseen circumstances, market timing, or even random events that favoured their venture. And failing to acknowledge that, after selling your business, sets you up to fail the next time(s) around.
Plenty of the events a founder experiences in the life of their venture are outside their control. Starting with the womb from which they entered the world, a vast array of exogenous factors and circumstances might have contributed to a venture’s success, and for example, leveraged the founder’s efforts.
A sudden surge in demand for a product or service due to social or macroeconomic changes can propel a business. A small sanitiser manufacturer becomes a big one with oodles of cash flow thanks to explosive growth during a public health crisis, even if the founder didn’t anticipate or plan for it.
When new laws, regulations, or deregulations are enacted, they can create favourable conditions for some businesses at the expense of others. If a major competitor collapses due to their own missteps (e.g., a scandal or bankruptcy), a founder’s business might gain market share and no extra effort – mental, strategic or physical – is required on the part of the founder.
And what of the idea that consumers ultimately ‘anoint’ a product or service? Ten entrepreneurs each launch an app that does the same thing. They’re all as smart as each other, they all put in the same money, the same labour and hire similar staff. They all launch their app on the same digital ecosystem. A few early consumers decide they like the ninth app, and start telling their friends. Because the apps all benefit from the network effect, number nine experiences surging uptake and usage, not because it was in any way better than the others, but because consumers simply ‘decided’ it would be the one they use.
There was no unique skill, strategy, or execution that differentiated it, and nothing the entrepreneur did, other than reinvest the rising revenue into more advertising, which attracted even more consumers, made any difference. And the other founders would have done the same. The founder of ‘App 9’ simply ‘hung on’ to the business’s coattails as it took off.
Genius or something else?
Few studies have investigated a connection between luck and entrepreneurial success. However, among the few studies that have investigated this question, a study by Liechti, D., Loderer, C., & Wenzlaff, K. (2018), entitled, Luck, Skill, and Success: What Entrepreneurs Believe about the Factors of Their Success., found entrepreneurs ranked ‘luck’ as last among several other potential factors of success. Entrepreneurs consistently ranked “luck” as the least significant factor contributing to their success, placing it below other factors such as skills, effort, or strategy, regardless of their individual backgrounds or traits. This suggests a strong belief among entrepreneurs in the primacy of controllable factors over chance in achieving successful outcomes.
In a more recent study by Lough, B.J. and McFadden, A., entitled, Do founders attribute their success to skill or luck? (2023)., the authors analysed transcripts derived from 183 U.S. podcast interviews that ask successful entrepreneurs whether luck or skill and hard work account for their success.
At the end of the popular National Public Radio (NPR) podcast How I Built This, host Guy Raz asks successful founders to reflect on whether their achievements were due to luck or a combination of skill, hard work, and perseverance. Was their success simply a matter of being in the right place at the right time, or, given that luck is rarely on our side, did their grit and determination mainly drive it?
The authors of the study sought to qualitatively understand how founders perceived the role of “luck” in their ventures’ success, accounting for various perceptions of external control. They also sought “to understand additional factors that founders qualitatively attributed to their success – beyond hard work, skill, and luck.”
Across all the interviews, successful entrepreneurs attributed their success to a varied combination of luck and skill. Respondents that fell into the median range were represented by comments such as, “I think we are lucky, but I think what amplifies that luck and what makes one successful is hard work. It is skill. It is resilience. It is an appetite for risk-taking.”
Ten founders in the study directly referenced the phrase, “You make your own luck”, and many others provided some version of the same sentiment.
Where luck was acknowledged (the tails of the normal distribution), various sources were cited. Some founders who acknowledged their success was due to forces beyond their control pointed to divine intervention, the blessings or grace of God, or a generalised and unavoidable fate or serendipity. In fact, about seven per cent of all founders referenced the influence of some higher power in their venture’s success.
Another group of founders viewed their parents and other family members as essential elements in the luck equation. And a few founders turned the question of luck into a recognition of their “extreme level of privilege.” As one founder stated, “It’s 99 per cent luck. And beyond just being wildly fortunate, I’m wildly privileged.”
Importantly, as the theory of locus of control suggests, founders in identity groups with higher privilege may lack awareness of how their privilege creates ‘lucky’ opportunities. But since entrepreneurial success is often linked to hard work (Lyons et al., 2020), this internalised view of luck might positively correlate with entrepreneurial success, and these founders could be more likely to recognise and seize entrepreneurial opportunities than those with a higher locus of control.
Alternatively, founders who come from marginalised social positions may need to work harder to achieve success, so they may be more likely than their non-entrepreneurial peers to attribute their success to skill over luck.
Finally, and perhaps most commonly, founders noted the luck was the consequence of their own effort and decisions and therefore under their control – “I feel lucky that I have opportunity in my life and that I’ve surrounded myself with people that care about me…you need to surround yourself with people that believe in you.”
One part of the solution
First, reflect on your journey to date and acknowledge where circumstantial events or meetings occurred beyond your control. This will lead to an acknowledgement of happenstance in your success. It will also set you up with a more prepared mindset for the next venture.
And if luck has contributed to your current success, and luck, by definition, involves the uncontrollable and randomness, then re-evaluating future risk-taking and focusing a little more on wealth preservation makes sense.
With that in mind, investing a portion of your wealth in a private credit fund may be worth discussing with your adviser to see if it’s appropriate for your circumstances.
Even if you are deemed a wholesale, experienced or sophisticated investor, you should seek personal professional advice before you make any investment decisions.
If you’d like to discuss business, markets, luck or private credit, I can be reached on (02) 8046 5000. Discover more about private credit here.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
