I started my first business in 1996 with just £12,000. My Father got his 50% back a year later as a dividend and still owned the shares. He remarked that it was the best investment he’d ever made. My Father was not a business man but he was interested in me and my career. When I first promoted the idea he was the toughest questioner I had and I know he invested because he believed in me rather than the idea. Just as well because a year later I was running a completely different business than the one in the business plan!
I thought this story was unusual… until I came across some very interesting data in Scott Shane’s excellent book “Fool’s Gold”. For this pie chart I have combined data from the report “New firm Creation in the US: A PSED I Overview”, 2007 and Reynolds 2004 “Entrepreneurship in the United States Assessment”, Florida International University all of which was reprinted in Scott Shane’s excellent book “Fool’s Gold” . The report provides an estimate for the total capital market of $310 billion invested in young companies annually in the USA.
As you can see, 25% of companies received their investment from close family members. In fact, 49% of entrepreneurs receive money from people they have known personally for a long time. Just 4% of money came from Angel Investors; nearly half that from VCs and Small Business Investment Companies (SBICs).
While you should never take figures at their face value we can conclude that in the USA in 2004, just $12 billion of funds were invested by Business Angels rather than the Entrepreneur, Friends and Family who invested $276 billion. There are two messages we can take from this:
- If you are a company… spend twelve times as much of your time seeking investment from friends and family rather than Business Angels (49% of start up funding comes from friends and family and only 4% from Business Angels).
- If you are a Business Angel… increase the number of your friends (increasing family is a longer term strategy!) since you are more likely to find investment opportunity through that route than being a formal “Business Angel”.
In both cases it is your support network that is important…