I have previously written about the pros and cons of borrowing startup capital from family and friends in the post “Accepting Start-Up Capital from a Family Member: Good or Bad?” I know that a lot of entrepreneurs rely on family members, friends and even acquiantances to invest and finance their business. But I’ve always wondered how many entrepreneurs are actually getting funds from what is described as “informal investors.”
A 2003 study made by Babson College and Kauffman Foundation under the Global Entrepreneurship Monitor project entitled “National Entrepreneurship Assessment – United States of America” has interesting data on the so-called “informal investors.”
Informal investors are persons who individually invest in new and expanding entrepreneurial endeavors. The study shows that more than 50% invest in a relative’s business. The breakdown in terms of the relationship of the investor to the investee is:
- Close family – 41.8%
- Other relative – 10.5%
- Work colleague – 6.1%
- Friend/neighbor – 28.5%
- Stranger – 9.4%
- Other – 3.6%
I find the study’s data on when these informal investors expect to be repaid fascinating (they actually expect to be repaid!). The study shows that the expected payback period is:
- 6 months – 20.4%
- 1 year – 8.6%
- 2 years – 17.7%
- 5 years – 24.7%
- 10 years – 5.5%
- 20 years – 2.3%
- Never – 20.8%
Where are those 20.8% who said they never expect to be repaid when you need them? Why can’t I have them as my family members or friends?
There are many more interesting data from the study. Read the study “National Entrepreneurship Assessment – United States of America”
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