Informal Investment

Founders and informal investors, including families, friends, and private investors or foolhardy strangers, contribute to investment in start-up companies. Foolhardy strangers are also called 'business angels'. The term originated in the early 1900's. At that time wealthy individuals salvaged Broadway productions in last-minute investment.

The importance of informal investors to entrepreneurship and new business venturing is often overlooked due to the exposure of venture capitalists in the public media. It is true that venture capitalists are behind the success of many high-profile ventures. The amount of their investment is, however, much less than informal investors. Informal investors provide much more investment than venture capitalists do (a ratio of 12 to 1 in Hong Kong; 54 to 1 in mainland China).

Informal capital is also important in another way. New ventures are being developed in a number of stages. Most founders cannot afford the resources for developing a marketable product simply using their own sources of capital, but venture capitalists seldom invest in early stages to facilitate the process. They invest more often in the later stages to facilitate ventures to scale up their production. Informal investors are, thus, indispensable in filling the resource gap for entrepreneurs. Informal investors also provide valuable advice on management, finance, and other matters.

Using GEM data of 2003 and 2004, we conducted a preliminary study on informal investors and offered some insight into their characteristics. We also offered some recommendations for policy makers and parties who are interested in promoting entrepreneurship (GEM informal investment 2004). A few more recent publications are as follow:

Au, K. and White, S. 2010. Hong Kong’s venture capital system and the commercialization of new technology. In D. Fuller (ed.),Innovation Policy and the Limits of Laissez-Faire: Hong Kong's Policy in Comparative Perspective. Hampshire, UK: Palgrave Macmillan.

Au, K., & Kwan, H.-K. 2009. Start-up capital and Chinese entrepreneurs: The role of family. Entrepreneurship Theory and Practice, 33: 889-908

More vigorous and detailed studies are being planned. Interested parties should contact us for collaboration and further information.