Feb 8, 2015

Animal Spirits: Here’s how to get rich quick. Staying rich is harder

An ambitious young man recently asked me how he could make a legitimate fortune in a hurry. 

On the assumption that acquiring riches through marriage or inheritance were not available options, I recommended that he should become an entrepreneur. Generally speaking, it takes patience to grow a substantial company and sell it for a large sum. But there are some avenues where markets appear willing to attach enormous values to very young businesses.

One field is biotechnology. It’s a highly cyclical sector, but during boom times, with the right project, the enthusiasm of stock markets and venture capitalists can be unbounded. Currently cancer immunotherapy is seen as a sexy niche with enormous potential for delivering transformative cures.

At least five such companies have gone public in the past 12 months alone. Juno Therapeutics, the largest biotech float in America in 15 years, is currently valued at about $3.5bn (£2.3bn). It was formed in August 2013, has no revenues to date, and is losing at least $50m a year. One could argue that the founding shareholders have created large fortunes almost overnight — at least on paper. Juno has several promising drug candidates that target diseases such as leukaemia. If they are successful, the profits could be enormous.

But the odds are always long in drug development. The same hopes fuelled the other 70 biotech companies taken public on Wall Street last year, which between them raised more than $5bn. Of course, the principal protagonists in such undertakings are scientists trained to research new medicines. So it helps to have the right qualifications, experience and contacts in the appropriate branch of medicine if you want to get rich in biotech.

Another way to amass sudden wealth is to win valuable planning permissions. The perfect example is to buy arable fields, which typically fetch about £7,000 an acre as simple agricultural land, and then gain permission to build houses. Depending on where the land is and the density of housing permitted, the value can leap twentyfold or more with the right consents. Of course, the process of obtaining planning permission can be slow, painful and risky. I’ve been involved in projects that have taken five years or more to secure the right permissions. It has become an increasingly technical and expensive process, requiring extensive input from many professionals for big schemes.

Property developers are masters at the art of playing the planning game, maximising value while minimising exposure. Those I have known mostly trained as surveyors and estate agents before taking the plunge to become principals. I once met a fabulously wealthy American who would buy tracts of farmland on the very outskirts of growing cities such as Denver, and then simply wait. Over time the suburbs encroached, and eventually the house builders came knocking, often willing to pay huge multiples for his land.

An alternative route to a dramatic fortune is mining for natural resources. As Paul Getty said: “Formula for success: rise early, work hard, strike oil.” The classic case is Lang Hancock, the Australian minerals magnate, who discovered the world’s largest iron ore deposits in 1952 in Pilbara, Western Australia, while flying over the area to avoid storms. He saw from his aircraft that the walls of a gorge in the Turner River looked like solid iron. He staked his claim and agreed a royalty deal with RTZ, which funded the entire development. His daughter Gina Rinehart inherited his estate and has become one of the richest women on earth. Again, specialist knowledge of geology is useful, although Hancock never studied the subject formally. And of course timing matters: at present many commodities like oil and iron ore are in a slump, and hence financing exploration and promoting such assets is much harder than a few years ago.

The newest way to swift prosperity is to establish a digital start-up. According to Fortune magazine, there are more than 80 such companies worth $1bn or more. Most have been around only a few years, with many based in Silicon Valley. They include Square, valued at $6bn, Pinterest at $5bn, Snapchat at $10bn and Airbnb at $13bn. Yet none has sales of more than $250m. The majority are still private, but some plan to go public soon.

Of course, it is rare with an early-stage tech or biotech float for founders to be able to take out much cash on issue. The stock market funds the company’s growth rather than lining founders’ pockets. But over time early investors can exit when lock-ups fall away and secondary offerings are permitted. However, the model doesn’t always work. During the dotcom boom 15 years ago I was a co-founder of a business called NewMedia Spark. On listing, my stake was worth at least 100 times my initial investment. Unfortunately, by the time I could sell a few years later, values had crashed and my shares were worth a fraction of that. In my experience, sudden fortunes can evaporate just as rapidly as they arise. Better to take one’s time and create lasting value.