I'm working on a new book — the working title is New Money Mistakes: True Stories of the Biggest Mistakes People Make After Getting Rich.
For it, I've interviewed more than 30 people who came into serious money suddenly. A business sale. An inheritance. A stock payout that finally became real. For each one, I asked the same question: what's one big mistake you made after you became suddenly wealthy that you're willing to share anonymously, so somebody else doesn't make the same one?
What follows is one of those chapters. The book is a collection of stories just like this one — real mistakes, real numbers, shared anonymously. Almost nobody warns you about this stuff before it happens to you.
Decide the Total First
Decide the total you'll invest in any one asset class before you write the first check.
Meet Ben. He sold his venture-backed tech company, and when the money hit, he set out to become an angel investor, writing checks with no plan for the total he'd invest in the asset class.
After my company sold, I started angel investing. It made total sense. I was a tech founder with tech founder friends. I had raised venture capital, sold my company, and was living in San Francisco, the tech mecca. If there was anybody who should be angel investing, it was me.
A deal would come along, it looked great, I wrote a check. Anywhere from $25,000 to $750,000, depending on my conviction in the company. The problem wasn't the check size. It was that I was never clear on how much I was going to invest in total in this asset class. I just kept writing checks.
Over a few years the checks added up to about $3 million across 34 startups. I never decided to invest $3 million. Every interesting company just got a new check, with me oblivious to the running total I was putting into the asset class.
It ended the way angel investing usually does. The $3 million turned into pretty much nothing.
The mistake was never any single check, or even investing in the asset class. It was writing the first check without ever deciding how much in total I would allocate to angel investing. When I finally tallied up the checks, nearly 25 percent of my net worth had gone into an asset class where most investments go to zero. If you'd asked me on day one, I never would have signed up for that.
So if you want to invest in an asset class like angel investing, go for it. Just set the maximum you'll invest across the whole asset class before the first check. Treat it as a pool of money you pull from, sized as a percentage of your net worth. And for something as risky as angel investing, make it a percentage you'd be completely okay with going to zero, because that's the most likely outcome. It was for me.
Angel investing wasn't the mistake. The mistake was never deciding, up front, how much I was going to invest in the asset class. Decide the total first, or you'll end up investing way more than you ever intended.
What do you think? Would you want to see more of these? Tell me in the comments.
Come into sudden wealth yourself, or know someone who has? If there's a story in it that could help someone else avoid the same mistake, and you're willing to share it anonymously, get in touch.