Startups Still Rely Heavily on Family for Funding

The number of Americans who make investments in private businesses belonging to friends and families has changed little in recent years. “People they know” remain the main source of financing for startup companies. When it comes to strangers, people are less inclined to part with their money, according to recent studies by the Federal Reserve Board of Governors and Babson College as reported by SmallBizTrends.com

The 2012 Global Entrepreneurship Monitor found that only 5.3% of Americans personally provided funds

for a new business started by someone else, excluding any purchase of stock or mutual funds during the prior three years. In 2007, 4.5% of those surveyed as part of the General Entrepreneurship Monitor said that they had invested in a new business started by a non-relative. Moreover, the typical amount invested by those providing funds was only $5,000.

The majority of informal investments, 50.2%, tend to go to a relative of the investor. The next biggest fraction goes to friends, neighbors, and coworkers, at about 35.3%. In 2012, only 11.4% of the investments went to a “stranger with a good idea.”

Many in the entrepreneurship community have been banking on equity crowdfunding to help boost the number of Americans who invest their money in startups. The Securities Exchange Commission under the JOBS Act lifted the 80-year long ban on general solicitations, making it now legal for entrepreneurs to advertise, market, and publically promote their capital raising activities online (and even offline with TV ads) to investors.

However, the SEC has not done away with the requirement on accredited investors (those with a liquid net worth of $1 million). Allowing crowdfunding from non-accredited investors is still on the fence.