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Professor touts silent but vital economic cog.


Unless you're holding a miracle drug or magic software that speculators will wager millions on, forget venture capital and wealthy angels, says Professor William Bygrave, head of Free Enterprise Studies at Babson College in Wellesley, Mass. Your best bet lies closer to home, possibly under your own roof, and certainly with what Bygrave calls the Four Fs: founders, family, friends and foolhardy strangers.

According to Bygrave, the Four Fs put up more money for startups and growing businesses than professional venture-capital firms, yet he says these "informal investors" are all but invisible when it comes to public policy intended to stimulate businesses and grow jobs.

Bygrave headed up a research group called the Global Entrepreneurship Monitor, which studied the economic importance of informal investing in 31 countries. Some of GEM's findings:

* Informal investors funded 99.96 percent of all businesses and supplied 90 percent of the total amount invested in businesses in the 31 countries surveyed.

* Almost five in every 100 U.S. adults report they have invested in someone else's private business in the last three years.

* More than half of all informal investments in the U.S. are made in relatives' businesses.

* In 2003, informal investors in the U.S. provided more than $100 billion to startups and small businesses, compared with $18.2 billion put up by formal venture-capital firms.

Bygrave hopes his report, which is posted at, will encourage legislation such as tax breaks for people who invest in a family member or friend's business. Weighing in on an issue that was debated during last month's presidential campaign. Bygrave questions whether taxes should be raised for people who earn more than $200,000 a year, reasoning that it would inhibit informal investment from this vital group.

The professor's other policy suggestions include reducing the complexity and cost of registering a new business; increasing cultural support for entrepreneurial career options; and reducing the scope of economic activities managed by the government.

Mostly, Bygrave would just like to see informal investing get the same consideration in Washington as the venture-capital industry.

"Back in the early '70s when formal venture capital almost dried up, it almost immediately came to the front of the national agenda: 'What can we do to generate more venture capital?'" Bygrave recalls.

"And rather swiftly they did a lot of legislation in Washington. They repealed what we called the "Prudent Man Rule," which relieved a tremendous restraint on how pension funds could invest in venture capital funds; and they lowered the capital-gains tax. Sure enough, over the next few years we saw a big up-tick in the amount of venture capital."

And yet--Bygrave makes the point repeatedly--informal investing in business is a much more important cog in the economy than formal venture-capital investing. "If venture capital went away, we'd still have a very vibrant entrepreneurial sector," Bygrave argues. "But if informal investment went away, the entrepreneurial sector would drop dead.

"I'd like to see informal capital right at the center of the debate of entrepreneurship and job creation, just as venture capitalists and the National Venture Capital Association have managed to do, and keep it there."

Not that Bygrave has anything against venture capitalists. In 1969, he founded (and later sold) a venture-capital-backed company that produced components for medical CAT scanners. Later, he and a partner started a medical-database company for which they turned down venture-capital offerings before selling the company. He also served on the board of a venture-capital investment fund.

"I've dedicated a big hunk of my adult life to venture capital," says the professor, whose 1997 book, "The Portable MBA in Entrepreneurship," is still required reading in some upper-level college business courses.

The professor is right when he says informal investors lack a strong voice in Washington. If the Four Fs became a formidable lobby group, they'd stand a better chance of winning tax breaks and other pro-business incentives. Of course, in Uncle Sam's and the IRS's eyes, they'd also no longer be informal.


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Title Annotation:money matters
Author:Taylor, Mike
Geographic Code:1U8CO
Date:Nov 1, 2004
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