Incentives and Asset Allocation

One question that frequently comes up when looking at a financing round is the asset allocation for current investors (usually Friends and Family or Angel Investors). If these sources of funds are fully allocated, there is a clear justification for looking for additional, new investors. One aspect that I have yet to hear considered is the asset allocation for the Entrepreneur.

The following post from Flow of Time discusses the unusually high risk that entrepreneurs take.

“From the risk management perspective startup investing is anyhow risky. It’s less than one third of all deals that are worthwhile even for the management. Portfolio management methods scream red when considering the case of a CEO & founder in a startup. First of all, the person has dedicated considerable amount of time and effort for the case from 0-2 years before the seed investment. When the seed investor comes in the founder can be required to invest some more personal wealth for the case. In this phase the entrepreneur earns the living from the venture, has invested additional money for the case (or taken another mortgage for the house) and is required to keep the company in the very steep growth track for several years for the optimal growth.”

It seems that in certain cirucmstances, reducing an entrepreneur’s risk in a venture might actually improve that venture’s returns for all parties involved.