In a recent article in Bloomberg, Simone Foxman discusses the rising trend among the centimillionaires investing directly in private enterprises and away from managed products.
While I agree with the author, let me expand on a few points.
You Don’t Have to be a Centimillionaire to Play in This Market
First of all, it’s not just the centimillionaires who have been buying stakes in companies – or lending them capital to take advantage of an opportunity.
While the numbers vary, most reports agree that there are more than 10 million accredited investors in the U.S. alone, and more and more of them are investing private companies.
What Drives Investors to Small, Private Enterprises?
One reason Foxman’s article touched on is envy or FOMO (fear of missing out). It’s not uncommon chatter at cocktail parties to overhear the enormous success someone has had with a small business investment (you don’t hear about the deals that went south as much…) And, depending on various factors, that investment doesn’t have to be large.
I think growing investments in private companies are motivated by more than just envy or some kind of social rivalry. Being part of a start-up, or a small company that has a chance to make its mark, is exciting and meaningful. I like to use the word “meaningful,” because these investors get to participate in the rawest form of capitalism. They help at a time when the entrepreneur is needing capital urgently in order to capture the value in providing some market solution, and, furthermore, being a part of an enterprise can be meaningful to the investor.
We all like to see tangible results of our time, efforts, and other resources spent (resources like our hard-earned dollars…). To see an idea come to fruition in the form of a product or service, and then to have that idea’s value recognized in the marketplace via successful sales and growth can be a very tangible, thrilling, and satisfying experience for everyone involved in that success. This is something that extends to that engaged investor and is one of the reasons I think so many people are taking their latent capital off the sidelines and into the game.
Now, caveat emptor – small business investment is a high-risk arena for some investors for a portion of their portfolios. And, to repeat one of my common refrains, due diligence is critical. So is diversifying across a number of investments to help manage risk.
That being said, opportunities abound and are available not only to the Uber wealthy but for accredited investors who want to invest nominal amounts in something that matters.
Don’t just take my word for it, read the full article from Bloomberg here.