It’s not unusual for America’s wealthiest individuals to invest through angel groups or sit on boards at venture capital firms. But these days the superrich also want to own and operate small companies where their deep pockets and powerful networks can create growth, says Mindy Rosenthal, executive director of the Institute for Private Investors in New York, whose membership consists of 1,100 investors, each with minimum investible assets of $30 million. Four in 10 member families have assets of $200 million or more.
Her members’ interest in private companies surfaced after the 2008 financial collapse and resulting stock market volatility, and it has been growing. A survey released earlier this month by the networking group shows that more than half of its members plan to increase direct investments in private companies this year. In February the group will offer members a first-time panel in San Francisco called Buying Small Businesses.
“Small business owners looking to sell are going to find a lot more people interested in buying them,” predicts Rosenthal. “Most people who are ultra-affluent can, at the end of the day, trace their money back to a business. There’s a sensibility associated with running a company—creating a product or intellectual property, employing people, creating jobs—that makes you feel more like you’re controlling your own destiny,” she says, adding that even corner bakeries with as little as $1 million in annual revenue might be attractive to her membership.
TENDENCY TO FLOUNDER
New York business consultant Andrew Graham is skeptical the country’s wealthiest are suited for the grueling hours and high risk that go into successful business ownership. He cites the experience of a business acquaintance who became fabulously wealthy when his family sold a legacy company a decade ago. “He’s floundered around from one opportunity to another, not losing a lot of money but not able to replicate his success and becoming very frustrated in the process,” Graham says. “The truth is, other people in his family business brought skills into the company that he doesn’t have.”
Paul Kedrosky, a senior fellow at the Kauffman Foundation, says he has seen wealthy individuals buy small companies and use them to generate income. If the buyer later wants to unload the company quickly, however, it could seem as if something is wrong with the business, reducing its value. “The stock market may offer a relatively low return, but if liquidity is required [and you need to sell a private company], you may have to take a 30 percent discount,” he says.
Another stumbling block could be privacy, something Rosenthal’s members value highly. She would not disclose the exact location of the group’s upcoming meeting nor pass along an interview request to members, for instance, due to privacy concerns. Yet small business owners in most cases must become the public face of their companies, representing them not only to employees and vendors, but also to the community and industry at large.
Boredom motivated Bill Stensrud, a serial entrepreneur and venture capitalist named one of San Diego’s 20 wealthiest residents by AllBusiness.com. A year after retiring in 2007, he partnered with his son and nephew to found SwitchCase Group as a kind of private business incubator in San Diego. It now owns four technology companies that employ a total of 40 people and together generate about $20 million annually. He does not take a salary from any of the companies but splits the free capital they generate with his employees through profit-sharing arrangements.
ELEMENT OF MENTORING
“I think of myself as a kind of micro Warren Buffett, buying a portfolio of related businesses I can keep and grow,” Stensrud says. “I’m looking for troubled companies with cheap turnaround costs and young founders who need and want adult supervision. This is as much about mentoring them as it is anything else.” Building solid businesses with the potential to generate $10 million to $30 million annually “is a fun concept,” he says.
That’s the kind of outcome that many wealthy private investors could enjoy if they have the savvy and determination necessary, says Bruce Barringer, an entrepreneurship professor at Oklahoma State University. “It’s not uncommon that people like to go back to their roots as they get to a certain point in their lives, and for those who’ve come out of entrepreneurial families, this might be a perfect fit,” he says.
And even if the fit isn’t always perfect, if more of the superrich purchase small businesses, there could be a residual upside nonetheless, says Gene Miller, director of the Lloyd Greif Center for Entrepreneurial Studies at the University of Southern California: “If nothing else, it’ll get some of that money back into circulation in the economy, which is a good thing for all of us.”