Build Your Business to Finance Your Apocalypse Fund

Posted by 4 Comments on Build Your Business to Finance Your Apocalypse Fund
Apocalypse
Keep them away

“‘Someday’ is a disease that will take your dreams to the grave with you.”
–Tim Ferriss

Tim Ferriss recently appeared on the Hulu show A Day in the Life, and one of the snippets of his day was advising a startup which had recently won a competition (go to about 24:45 into the show). His advice was that if you are an entrepreneur and you are both provided an offer which can materially change your life and feel confident in your ability to generate more ideas and create new businesses, then you should take the offer.

Ferriss called this amount an apocalypse fund. To me, an apocalypse fund can mean a fund which, even if you never worked another day in your life, would fund a basic standard of living. It could be enough to ensure that you had a pretty good standard of living without working, but it’s not the type of fund that would allow you to purchase yachts and private jets and go port hopping from St. Tropez to Monaco to Ibiza for the rest of your life.

An entrepreneur who is faced with the opportunity to sell out for apocalypse fund money but not yacht club money faces an interesting dilemma. The entrepreneur has built up the business enough to where it has some value and growth prospects, which is why he’s being offered a buyout from someone else; however, because of those growth prospects, the entrepreneur is probably leaving money on the table if he takes the offer.

Here’s how I thought about my apocalypse fund offer when I was bought out of the company I co-founded.

  • I remembered prospect theory, which states that a person will suffer more pain when losing money than joy when gaining the same amount. Even though my company was growing and had plenty of prospects for being worth more in the future than at the time I took the deal (those prospects turned out to be realized), I was fairly risk-averse, as I didn’t want to, at some future time, look back and rue not taking the deal.
  • I maintained a reasonable minority stake in the company, meaning that if it continued to grow, I would get a piece of the action. I was, in effect, taking most of my winnings off of the table and playing with house money. If the equity stake wound up being worthless, then I would not be hurt by it, but if it wound up having any value, then I’d have gravy.
  • I had confidence that I could build another business. Many of the steps that I took in building the one that I sold are replicable, and I certainly learned from my mistakes in building it. I have plenty of ideas, which I jot down in various places. However, if I try to build anything big, it will definitely be with the help of outside equity, since I now have established a track record.
  • After, at that point, five and a half years, I was burned out in building a company revolving around something for which I had minimal passion. There was quite a value, to me, in taking a known amount in exchange for being able to start with something new.
  • Having the apocalypse fund will allow me to be much more risk-seeking in the future. If presented with a similar opportunity in the future, I can stick around longer, trying to create and capture as much upside value as possible before selling. In other words, I can shoot for yacht and private jet money.

In summary, my decision to sell came down to building that apocalypse fund. I didn’t want to have the remorse of looking back at an opportunity to sell out if bad things happened in the future, although to this point, they have not. Just as having no mortgage payment creates a sense of security in your housing situation, having an apocalypse fund gives you a sense of security about the future and enables you to pursue new entrepreneurial ideas knowing that you’re not walking the tightrope without a net underneath you.

What would you do if you got an apocalypse fund offer? Tell us your thoughts in the comments below!

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Jason Hull, CFP®, is the Managing Member of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies.

4 replies on “Build Your Business to Finance Your Apocalypse Fund”

  1. My boyfriend sold his company for “apocalypse” money: not enough money to retire on (after it was split between all the co-founders), but certainly a sizable amount. Enough to begin his young life with a decent cash stash.

    You know what’s funny? He doesn’t even think about that money very much. It’s tied up in investments that are doing well – not rockstar, but well – and he’s all but forgotten that he has it.

    His attention is on the next business that he’s growing. I suppose that’s the hallmark of a serial entrepreneur.

    And its been interesting to watch how his co-founders handled the money. Some saved it. Some didn’t.

    1. Your anecdote about your boyfriend reminds me of when I used to play internet poker (when it was legal, or at least, not as illegal as it became). There were some people who did well and lived up the “balla” lifestyle, living in Vegas, eating their way through every hotel, and blowing their money. They acted as if there was an endless supply of it. There were others who did well and were wise about the money, saving enough so that if the poker spigot ever got shut off, like it did, they wouldn’t ever have to work.

      The former never got over money for money’s sake.

      I think both your boyfriend and you (from reading your awesome blog Afford Anything) have the right mindset about money. It’s a tool which you use to make more which then enables you, when you’ve created the artifacts which create more money (real estate, small businesses, smart investments, etc.), to do the things which are priorities in your life.

      Money is never a priority in life. It is a tool which enables you to meet those priorities.

      Does having a boyfriend who also has the “successful exit” t-shirt affect your outlook in how you’ve approached investing?

  2. I think this is an excellent approach. I know several entrepreneurs who have sold their businesses, and they all took the same approach, more or less. I have had a couple companies approach me about buying my business, but it wasn’t quite enough for an apocalypse fund, and the post-sale terms weren’t to my liking. I have no regrets not taking those specific offers. But on the flip side, I would be open to a different offer, depending on the terms. I think most business owners should keep an open mind in that regard.

    1. I think a lot of people just gloss over the post-sale terms, particularly the ones with a heavy earnout component, because they either a) overestimate their abilities, or b) they don’t want to be forced to think through the actual steps of what it would take to earn the full earnout. Unless you’re in a situation where you’re looking for a white knight to save your company (in which case, you’re going to get unfavorable terms anyway), walking away isn’t a bad option; you’re still left owning a valuable asset which should be generating cashflow for you. When we walked away from the first one, we had a little (lack of) seller’s remorse for a couple of weeks but then came to the conclusion that we really had made the right decision, and had done so in a manner which left the door open for a later discussion.

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