The rich are paying it forward by supporting the next generation of wealth builders. In exchange for their money, they are looking for both a financial return on their investment and the less tangible reward of being involved in the creative chaos of start-up businesses.
A global report by research firm WealthInsight finds that millionaire venture capitalists are increasing their investment in start-up companies and emerging entrepreneurs.
A third of the millionaire venture capitalists in the study have a net worth of between $1 million and $5 million. Nearly 57 percent are between the ages of 45 and 64 and they are overwhelmingly male. Only 10.8 percent of millionaire venture capitalists are women.
The sweet scent of opportunity
Brent Fykes, senior investment partner at GenSpring Family Offices, says in the past few years he's seen an uptick in interest in venture capitalism among his clients, especially among former entrepreneurs.
The reasons are varied. Sometimes, he says, entrepreneurs have friends or peers in the same wealth category who are developing interesting businesses and they want to be part of it by investing. In other cases, a lack of clarity or confidence in the public equity sector and the economy lead them to diversify their investments by including the private sector.
"But the biggest and more interesting reason is that after 2008 and 2009, the economy created opportunities," he says.
Many of his clients who had made millions in the real estate business reinvested after the housing crash and have realized double-digit returns, Fykes says. Others took note of the void in funding for start-up industries after the recession and saw investment opportunities.
The daily grind
While entrepreneurs are seeking a return on their investment in the private sector, just as they do in the public arena, the thrill of being back in business is a big draw. According to the study, in more than half the cases, entrepreneurs put their investment to work in the industry where they had success. Tech/software is the most popular industry for venture capitalists.
"A lot of my clients who have been out of the operational, day-to-day side of the business want to go back and get their hands dirty, rather than be a retired entrepreneur," Fykes says, adding that although they want to have input, they don't necessarily want to be involved full-time. "They like a hands-on approach," he says.
Oliver Williams, an analyst at WealthInsight, sees the trend toward venture capitalism as a win for both sides. "Unlike other start-up investors, millionaires have so much more to offer than just their millions," he noted in the report. "Millionaire venture capitalists are normally entrepreneurs themselves, meaning they can offer the wisdom of somebody who's started out themselves, in addition to a valuable address book."
Interested in finding a rich financial backer for your start-up? Read what it takes to attract an angel investor.
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