16 Sep Family reunion? Don't forget your business plan
Several years ago, while attending a conference on equity capital, the category of financing labeled “friends, family and fools” drew more than a few snickers from the participants.
It turns out this “informal” source of capital, along with the entrepreneur’s personal funds is nothing to laugh about, according to the most recent Global Entrepreneurship Monitor (GEM) report.
William D. Bygrave, a lead researcher of the GEM finance report, says entrepreneurs “should forget about formal venture capital sources” such as angel and venture funding.
The report goes on to say that self-funding and informal investing is the lifeblood of an entrepreneurial society.
The research report, the largest annual measure of entrepreneurial activity worldwide spanning 34 countries, provides insight into an entrepreneur’s profile, potential sources of capital, motivations, and local culture. Some of the findings from the GEM report:
• 99.9 percent of businesses are launched without any formal capital. Entrepreneurs provide 65.8 percent of the start-up capital, while 34.2 percent is provided by informal investors (family, friends, colleagues, neighbors and strangers).
• 88 percent of America’s 500 fastest-growing private companies never received financing from business angels. 33 percent of the same 500 companies raised start-up capital by tapping the assets of family and friends.
• Entrepreneurs are four times as likely to fund a deal than non-entrepreneurs.
• Entrepreneurs are wasting valuable time by prematurely seeking seed capital from business angels and even from formal venture capitalists – searches that come up empty almost every time.
• In the US, informal investments amount to more than $100 billion annually or 1 percent of GDP, according to the GEM report. Venture capital, meanwhile, went to only 2,500 companies.
What do the reports findings suggest for Wisconsin’s strategies to foster, grow and finance “New Economy” businesses?
While we can’t take anything away from the substantive effort to bring more equity capital to the state, the report highlights the importance of matching entrepreneurs with appropriate sources of funding the business.
Trevor D’Souza, managing director of Milwaukee-based private equity investor Mason Wells agrees. “Not all good business are VC-fundable, and just because you get VC funding does not mean that you will succeed,” he said. “VCs have a high expectation for returns in a five- to seven-year time frame, and this eliminates many business opportunities that would otherwise provide a profitable living for the owners.”
He goes on to say that “VCs are most impressed by customers, so entrepreneurs should spend more time chasing customers and less time chasing investors – until they reach a point where they have customers and need investors to grow the business faster.”
The GEM report suggests that a lot of great businesses (with high-paying jobs) are bootstrapped or started with informal funds. EPIC in Madison is an example where informal and early-founder money of $70,000 led to the creation of a national leader in healthcare technology with more than 1,000 employees. Wisconsin is enjoying the many benefits of this high-technology company: high paying jobs and the revenue inflows from its position as an exporter of technology products and services.
Wisconsin-based entrepreneurs need to be aware of their informal financing options and to be savvy when it comes time to talk to friends and family about funding their businesses. Bootstrapping is a phase for a few businesses that will eventually raise venture capital but, for others, it will be the only option. Unfortunately, bootstrapping and borrowing from your relatives doesn’t receive a lot of airtime.
Greg Gianforte, CEO of RightNow Technologies, has bootstrapped several businesses and raised venture capital. He extols the importance of self-funding to an entrepreneurial society. “The economy of our country depends on the next generation of young people initiating the next generation of business start-ups,” says Gianforte, author of the book Bootstrapping Your Business. “For that to happen, we need to let them know that starting a business is a worthwhile thing to do with your life – and we need to teach them the best way to do it.”
He adds that, “Bootstrapping needs to take the rightful place in our schools and in our media. By properly encouraging and training bootstrappers, we can have a significant positive impact on our economy and promote a much healthier and more vibrant business culture across all markets.”
Gianforte will speak on bootstrapping at a luncheon this coming Thursday, Sept. 22, in downtown Milwaukee. To register or for more details, e-mail email@example.com.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. (WTN). WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein.