Where Seed Money

Forget about venture capitalists, most people rely on the four F's.

By Cara Cannella | 
 

Though venture capitalists garner headlines, their economic impact turns out to be modest. A report issued at the United Nations' first-ever entrepreneurship symposium in April found that the leading sources of seed capital remain the so-called four Fs: founders, family, friends, and foolhardy investors (they prefer the term angels). In fact, only one in 10,000 private companies was VC-backed in the 37 countries from which data was collected. And the sums used to launch firms were small. In the U.S., for example, 43% of informal investors risked less than $1,700. Babson professor William D. Bygrave, the report's author, says that governments should implement tax incentives for informal investment in order to stimulate growth. On a practical level, he advises founders to be prudent when asking relatives and friends for money. Never accept more than you think your investor can afford to lose, he warns -- you don't want to bankrupt your relatives.