Taking Stock in People
Over the years I’ve worked with so many smart, resourceful, creative and hard working individuals. Often I would think “I’d like to make an investment in that person,” not in the more common, figurative sense of helping them grow and develop, but more in the literal sense. I’d like to give them some capital to propel them into a successful career or business.
Certainly I do that when I make angel investments in very early stage companies. When I invested in TechSmart a few years ago, it was really an investment in its passionate founder, Bruce.
Recently I learned of two other ways to invest in people.
Late last year I met a 30-ish entrepreneur. He’s smart, well-educated (ivy league undergrad and Stanford MBA) who’s already experienced some success in his early career. He’s ready to own and operate his own small business. But instead of founding a company or buying a franchise, he raised what’s called a search fund. This concept was pioneered by Stanford Graduate School of Business professor Irv Grousbeck. Stanford GSB now compiles exhaustive industry data and offers research and a primer on acquiring a business through the search fund model. Basically these search fund entrepreneurs spend 12 to 24 months exhaustively combing the US looking for a profitable small business with a current owner who’s ready to sell. The entrepreneur raises the capital needed to buy the business from investors - either individuals or nano-cap private equity firms, some of which invest exclusively in search fund entrepreneurs. For putting up all the capital to acquire the business, the investors typically end up owning 80%, but the entrepreneur owns 20% of the company as an incentive to grow the value of the company. Typically the entrepreneur would run the business for six or seven years, growing its revenue and profit margin, and then selling it for both a higher valuation and a higher multiple. It seems like an interesting way to invest in entrepreneurial go-getters!
The second opportunity to invest in smart and creative people is much riskier. In fact, it’s gambling. I heard a Planet Money podcast this morning, originally aired in 2016 but updated this week, about high stakes poker tournaments. These tournaments, typically have a $10,000 buy-in, attract as many as 8,000 contestants, and the winner - the final survivor in these single elimination tournaments - wins as much as $8M or $9M! It turns out that it’s pretty common both for players to trade stakes in each other (e.g. “If I win, I’ll give you 5% of the winnings and if you win, you give me 5%”) as well as for investors to make bets on some of the better professional poker players (e.g. “I’ll put up $2,500 of the $10,000 buy-in for 25% of your winnings). It’s a fascinating way to either invest in players, or if you are a player, to diversify your risk. Just listen to the 20-minute podcast; I think you’ll like it and learn from it:
