How to find informal investment…

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.

Sources of Investment, 2004 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…

This Post Has One Comment

  1. Great blog, from my modest start-up I would agree. VC and Angels don’t look for standard companies, they seek fast growth/return. And I understand why, so many companies just don’t make it.
    So I guess the question is “how can gov make it easier to start companies”, and “how can the education sector and UK plc give start-ups the skills-knowledge-culture to survive”. If most UK businesses are sub 5 staff, surely the way out of recession is to help small businesses grow.
    If growth is your aim, your customer is key. One thing to action whatever size of organisation is to map your customers’ journey, here is a simple plan to start you on your way

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