The importance of informal investing to New Zealand\u27s new and growing firms

Abstract

As part of the Global Entrepreneurship Monitor project, we asked 2,000 adult New Zealanders if they have made a personal investment in a new firm in the past three years as well as the magnitude of their supPort, the nature of the businesses they sponsored, and their relationship withthe recipient. We compared these data on informal investment to data on venture capital obtained from national sources. We are thus able to compare New Zealand\u27s performance to cross-national measures. We also surveyed 20 key informants/experts on questions on financing.In New Zealand, venture capital accounts for only 0.80/o of total investment in new and growing start-ups. Yet New Zealand is world-ranked in terms of informal investment. In New Zealand, informal investment activity is 3.5olo of the national GDP amount. New Zealand is also a world leader in the prevalence of informal investors (percentage in the adult population). Seventy-three percent of informal investors put their money into a relative\u27s or a friend\u27s business. Fifty-eight Percent of New Zealand\u27s informal investors are female, quite the reverse of the world pattern.When we compare Australia and New Zealandlo the rest of the GEM world, Australia ranks favourably with the GEM globat measures in terms of venture capital as a percentage of GDp, while New Zealand does poorly. Australia also does about 40olo better than New Zealand in termsof the amount of VC invested in individual companies. But New Zealand is clearly higher in the measures of informal investment. We conclude with implications for entrepreneurs, policy makers, educators, researchers, and journalists. In a nutshell, they should pay more attention to the critical role of the four F\u27s - family friends, founders, and &quot;foolish&quot; investors - in start-up ventures. Informal investment is a critical component of New Zealand\u27s entrepreneurial process and thus to its economic growth. Perhaps fifty superstars with extraordinary opportunities will receive financing from the New Zealand Venture Investment Fund to launch their businesses. Meanwhile, the vast majority of firms rely on the 4Fs - friends, family founders, and &quot;foolish&quot; lnvestors.<br /