Informal Sources of Venture Finance

Abstract

INTRODUCTION One of the most interesting insights from the Global Enterprise Monitor (GEM) – an annual international survey of entrepreneurial activity in some 40 countries - is that informal sources of finance overwhelm formal ones (Bygrave et al, 2003). GEM’s methodology captures two sources of informal financing – family members (often termed ‘love money’) and other individuals, the latter comprising investors who have come to be known as business angels1 who invest in new and young businesses where there is no family connection. Some 3.4% of the adult population in the 18 countries where information is available meet the definition of being an informal investor.2 They provide $196m per year to new and growing companies, equivalent to 1.1% of the GDP of these countries, and accounting for between 60% and 90% of total venture capital, including institutional sources (which is the subject of another chapter in this volume). In the USA, 5% of the population are informal investors, collectively investing $108 billion per annum, which is 3.5 times the amount invested by venture capital funds in seed and start-up investments (Bygrave and Reynolds, 2004). Most informal investment flows to family members and friends. In the 18 GEM countries, some 50% of informal investment goes to relatives, 29% to friends/neighbours, 11% to work colleagues and just 8% to a stranger (Bygrave et al, 2003). The proportions for the USA are almost identical (Bygrave and Reynolds, 2004).