Have you ever played poker? If so, you are familiar with the sensation called “tilt.” It is a reaction to either an unanticipated loss or a win that releases enough emotion to throw the player off his or her normal strategy. The result is a series of player mistakes that swiftly reduce the stack of chips built throughout the game.
The result of tilt is never ideal. Much has been written about the experience, and professional poker players frequently hire coaches to better manage their predictable tilt moments.
Family offices in Canada are typically founded when an entrepreneur has experienced tremendous success through a partial or complete exit from their primary business. Depending on the process and outcome of the sale, IPO or divestiture, a range of emotions result, from business invincibility to a sense of loss or frustration. Either way, there is a significant parallel to poker tilt.
One of the key roles of most family offices is the deployment and management of family capital. A recent poll by the Association of Corporate Growth (Toronto and Boston chapters) indicated that public equities are the least interesting investments to family offices. Instead, they are frequently attracted to direct, co-investments and alternative investments. Yet these are hard to find, assess and manage.
If you are an entrepreneur who is about to sell an enterprise, recognize that you are not invincible.
Let’s go back to entrepreneurial tilt and the mistakes that newly founded family offices are prone to make.
As the family office and entrepreneur contemplate decisions regarding re-deployment of capital from a divestiture, it is often the entrepreneur’s first time with such matters. In addition, the initial 24 months of post-exit choices may make or break the long-term financial success of the family office. Most disasters are never revealed or discussed because the process and results are made with private capital in a closed setting. The recently acclaimed business owner is not prone to share errors or losses, and this leaves other entrepreneurs vulnerable to making similar mistakes.
When entrepreneurs have spent their personal, financial and emotional capital to build something that results in a euphoric financial moment, patterns emerge in the aftermath.
Loyalty to advisors of the past
One cohort consists of business owners who hide their success from friends and family. This can be a lonely journey as they experience something outside their trusted group. This also leaves them vulnerable to those they perceive as more experienced financial peers or family office experts.
They also often stick with the advisors they have had since the early days. Unfortunately, their circumstances have probably outgrown the advisors’ proficiency, and loyalty maintains the relationship, which doesn’t always advance the family office’s objectives.
Another cohort of entrepreneurs is portrayed in the media as having made a significant amount of money, and they are thrust into their community’s spotlight. They often feel the pressure to maintain a persona that was created by others, and they strive to belong in this new foreign world of wealth.
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They are also often targets of requests for capital. The appeals come from start-ups, philanthropic fundraisers, investment managers, insurance professionals and family members. They also face the “new idea” crowd, which pitches endless funds, concepts and opportunities. Without a gatekeeper, the wealth creator may be at risk of saying yes due to information fatigue alone.
Entrepreneurs also face pressure to re-create their past success, to prove they can do it again. Alternatively, they may want to do it over again just because that is what they know, like an artist who always sees a blank canvas as the next painting. The label “serial entrepreneur” is valid, but it may also be their weakest financial trait.
Without a structured wealth strategy and well-thought-out family office investment policy that takes into consideration all family assets, nearly any opportunity can seem worthy of an entrepreneur’s capital. In many cases the same characteristics that made the entrepreneur successful are the ones that are about to undo him or her. They are on tilt. Emotions are running high, the ability to win seems always within reach and they don’t have a professional coach to help them determine great investments from mediocre ones.
They feel pressure to act
Additionally, some of the greatest stand-alone opportunities may actually increase overall risk, especially when the investments fit into a sector the family office is already accustomed to. A new investment can overweight the balance of family assets, which may have unintended consequences.
Wealth creators are in a scenario where their peer group is exceptionally private, they have a team of trusted advisors who may never have seen a client through similar circumstances, and they feel the overwhelming pressure to act.
These individuals will also likely be approached by private investment clubs with some cache that claim to have the answers they are looking for. In most cases, they end up taking advice from others who have the same amount of experience they do. Within this ecosystem, they, too, begin to give advice from their own singular lens. “Groupthink” occurs quickly and naturally.
In 2009, a Canadian business owner sold his company for more than $500 million (U.S.). By 2012 his net worth had dropped by half. No press release went out to highlight what went wrong. He felt invincible, didn’t hire impartial gatekeepers, invested in friends and family ventures, wasn’t willing to spend time and financial resources to find appropriate professionals, and stayed with the same trusted advisors he used for his business operations. Everyone claimed to be a family office expert or professional, and in his eyes they were.
Building a family office is a craft in itself. If you are an entrepreneur who is about to sell an enterprise, recognize that you are not invincible, your advisor team may need expansion regardless of loyalty, and paying for advisors who are truly experts in the family office sector may be the best investment you ever make.
Carolyn Cole founded Cole & Associates, a family office strategy and design firm, after a 25-year career working with enterprising families. She leads the family office for three prominent Canadian families. Carolyn also acts as Special Advisor to Grayhawk Wealth, Family Office Service, is a member of the Association of Corporate Growth’s Family Office Advisory Committee and recently launched Family Office Administration Services. Carolyn’s writing draws upon her personal experiences both from her capacity as an advisor and as the mother of two adult sons who are fourth generation of an enterprising family.