Investors sometimes lean toward small new companies, “startups”, which may or may not start up in Silicon Valley or some other major West Coast city (Seattle is another springboard for technology startups). What attracts the casual investor to a small technology company is a clear, profound sense of growth, stability, and profitability. These investors may be angels but more often they are friends of friends, former business associates, and very often “silent partners”.
When older engineers and executives retire from large industry companies they may not be ready to hit the golf course. Instead they have dreams or ambitions that cannot be realized on their old career tracks. These wise old owls of industry take with them a wealth of experience and contacts that they leverage into new businesses, often complementary to their old jobs.
For example, an entrepreneur like Nicholas Bredimus might start a business that fulfills a technological need his former employer could not satisfy. Bredimus is a software entrepreneur whose company revolutionized the travel ticketing industry in the 1990s. The software they developed made it possible for travel agents and airline ticketing agents to issue faster reservations and confirmations, to change seating and even travel itineraries almost instantaneously. The net effect was to transform travel management and reduce the cost of travel for business and tourist travelers alike.
Second career planning and economic development has been recognized as a vital component of growing economies and some governments now offer special programs to help experienced workers transition into better jobs or start their own companies. The second career phenomenon may increase the personal wealth of individuals who make the transition but it may also produce new jobs for younger workers who lack opportunity.
Much research has explored reasons why so many young companies end up in failure. If entrepreneurs are relying on their own savings they may run out of funding before they can attract enough clients and sales to create a self-sustaining cash flow. “Burn rate” is one of the most important factors to consider when investing in a new, small business. Does the CEO have the experience to manage that burn rate competently? Does the sales team have the constitution to build up the client base?
A single-client business may specialize in satisfying a very specific need for a large government contract or as a special sub-vendor for a large manufacturer, but any breakthrough in production technology may wipe out several years’ success. Take 3-D printing, for example. It is now possible to manufacture thousands of custom-parts with relatively inexpensive technology, thus eliminating opportunity for small engineering companies that might have started supplying new special components for future technology.
We must look at the threats facing a small business before making that investment. How realistic are the threats and how well does the business founder anticipate them? Some business owners enter an industry without realizing just how much competition there is, and consumer loyalty is a brand-sustaining factor that is converted into asset-like value by accountants in the form of Good Will. If you as the investor cannot project the growth of Good Will on the books then how practical is the investment you are about to make?
There are unquestionably economic benefits to second career moves. We can classify these benefits in three levels:
- The maintenance or improvement of personal cash flow, especially for laid off individuals
- The creation of new jobs to support the new companies
- The long-term contribution to the local economy
But the risks of investing in someone else’s second career merit close scrutiny. The type of entrepreneur who succeeds may be decided in part by luck or random chance but more often is someone who has the right connections. As an investor you should be ready to step up with your own connections to help the new business flourish.
