RENEE MONTAGNE, HOST:
A new crop of college graduates is about to leave school and start looking for employment, but a select few aren't bothering to search for jobs. They have more ambitious goals in mind: They're looking for a company to buy, thanks to investors who specialize in backing those searches. Ashley Milne-Tyte from our Planet Money team explains.
ASHLEY MILNE-TYTE, BYLINE: Alex Livingston graduated from Harvard Business School last year. He was offered a pretty sweet job at a startup, but he turned that down.
ALEX LIVINGSTON: Ultimately, it would never be mine. You know, it wasn't my idea. I would never become the CEO. There was a ceiling there.
MILNE-TYTE: He's 27, and he wants to be a CEO - not in 15 years, now. He and his business school classmate Eddie Santillan knew they wanted to run a company together. They just didn't know which company. They had no idea. But they did have moxie. So they went to investors and basically said, invest in us, be our partners, give us a chunk of money, and we'll look for a company to buy. If we run it successfully, you'll all be winners.
LIVINGSTON: The key is convincing someone that you have the gritty, resourceful, tenacious attitude to get, you know, not only the search process done, but then be an effective general manager.
MILNE-TYTE: Believe it or not, investors took them at their word. The guys raised a few hundred thousand dollars - money they're using to live on while they hunt down a company to buy.
Now, who exactly - other than mom and dad - would give money to a recent graduate who's never run their own business before? Lots of people, it turns out. This is a real corner of the investing world and it's growing. These investments are called search funds. And there are investors out there looking for young people to invest in, investors like Rich Kelley.
RICH KELLEY: I'm a principal at a small private equity firm called Search Fund Partners.
MILNE-TYTE: This seems crazy. Why would an investor invest in a person who doesn't even have an idea yet, they don't even know what kinds of company they're going to buy.
KELLEY: In essence you're buying an option to look at great deals.
MILNE-TYTE: He says these guys - and they are nearly all guys - they're called searchers. They toil away to find solid companies with good earnings potential. Kelley says eight or 10 investors like him each hand over about $30,000. Added up, that covers a salary and travel expenses for up to two years while the person hunts. Kelley says it's less than he'd pay a full-time employee to scout for juicy deals.
KELLEY: And they're looking for diamonds in the rough out there all over the U.S. And they're looking for deals in places where a typical private equity deal guy doesn't look.
MILNE-TYTE: He says think smaller companies doing unglamorous things, like renting restaurant linens or making machine parts. He says investors always want the searcher to buy a company that does something pretty boring. That way it's not too tough for an inexperienced person to run.
Jim Sharpe also invests in search funds. He teaches at Harvard Business School. He admits this route to entrepreneurship can sound incredible to the uninitiated.
JIM SHARPE: I've had one searcher tell me that when he told his parents about this, his father said: Son, this is a scam, this can't be true, people are giving you money to go not work for two years? There's got to be a catch here.
MILNE-TYTE: The catch is that young searcher is going to do all the work. And if they're successful the investor gets a cut and an opportunity to invest even more. The risk for the investor is that the kid never finds a company, blows the money.
When you sit down with that person what human qualities are you looking at that help you decide whether this person is a good bet?
EDDIE SANTILLAN: So I'm looking primarily to humility. The person has to be willing to learn from others in the process.
MILNE-TYTE: Those Harvard Business School grads, Alex and Eddie, they are more than willing. They ask their investors for advice all the time. And investors get that warm, fuzzy feeling.
LIVINGSTON: They like the idea of being able to kind of live vicariously through two young guys who are trying to make it work.
MILNE-TYTE: He and Eddie are trying to make their money last by renting a 10-by-20 foot office above a bar in San Francisco. They're now 10 months into their search. They came really close to buying a firm that makes stuff for hotels. They got emotionally invested, starting thinking about their first day at the company, then the buyer pulled back. Eddie says they've had to get used to the stomach-wrenching nature of the search and to business owners who don't take them seriously.
SANTILLAN: For a small portion of them, they kind of sit back and say: Huh, OK, so you guys have raised a little bit of money but you don't have all the money to buy the deal. You have a little bit of operations experience and background, but you don't have that much. Do I actually believe that you're a credible buyer?
MILNE-TYTE: Convincing them, he says, that's the toughest part of all. Until they can pull that off, their search continues.
Ashley Milne-Tyte, NPR News.
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