Informal Investment

Presented by Group 2Nancy

Minnie Allen

Outline

?

What can I do?

No capital !

No fund !

Situations faced by start-ups……..

?No fund !

No capital !

Common methods for raising fund……..

Banks * usually ask for collateral or personal guarantees

Venture capital funds* the only formal investment vehicle for financing start-ups aim at later stages but show little interest to start-ups

Government funding programs* limited capability

……

Formal investors

? ( ) ╯╰ …….

!

Informal investor

An affluent individual who provides capital and fund for a business start-up / beginner

including immediate family, friends, colleagues and strangers

Definitions

“F F F” (family, friend and ？ )

High risk ！

“fool”

More detailsInformal investors need to undertake high risk. “F F F” (family, friend and “fool”)

Many would like to choose those companies that have potential to develop and promise the greatest return.

Informal investors generally use their own money.

The capital is in small amount.

ImportanceInformal investors provide much more

investment than venture capitalists.

informal capital 34.2% venture capital 0.01%

-Increase capital liquidity

-Benefit a large number of enterprises

ImportanceInformal investors usually aim at start-ups or

early growth companies, providing seed fund and capital.

-Stimulate the development of early growth enterprises

-Strengthen the market confidence for start-ups

ImportanceGood combination of capital and experience Informal investors always sit on board and even take part

in business operation.

-help in strategy -find appropriate managers -provide valuable advice on management, finance

and other matters -link distributors and suppliers

-Give enormous encouragements

-Mean a lot to those start-ups that often lack experience

High risk! Why they come?

Angel investors are not only those that want to maximize their wealth in a “high risk” “high return” way......

but often include retired entrepreneurs or executives, who are interested in angel investment for reasons that go beyond pure monetary return......

Other purposes:Other purposes:*keep pace of current developments in a particular business

area*mentor another generation of entrepreneurs*make use of their experience and networks to help flourish

an industry …….

Much can be done by community associations, school networks, religious groups and charitable organizations.

not only “angels” for business,

but also meaningful to the country and the society

High risk! Why they come?

Individual Investor

Gender composition / Age / Education level / Labor force status / Occupation / Household monthly income / ···

Features of Investment

Informal investment VS Classic venture capital / Average amount of investment / Industries / Relationship between investors & investees / ···

Different Roles of Informal Investors in HK & SZ

HK

SZ

Prevalence Rate of Informal Investors (2004)

Individual Investor-

Gender Composition Informal investors in Hong Kong share nearly

the same number of males and females; while in Shenzhen, about 2/3 of them are

males.

Sources: GEM Hong Kong and Shenzhen 2004, Centre for Entrepreneurship, the Chinese University of Hong Kong

Male (%) Female (%)

Hong Kong 50 50

Shenzhen 66.7 33.3

Individual Investor-

AgeHK vs SZ informal investors by age (2003-2004)

We can see from the graph:1/3 of informal investors in Hong Kong are

between the age of 35-44, similar to other countries around the world.

Shenzhen’s informal investors are generally younger than Hong Kong’s.

possible reasonspossible reasons: in Shenzhen, the younger generation the rich

willing to invest in new venture make informal investments

Individual Investor-

Age

Individual Investor-

Education LevelEducation level of informal investors in Hong Kong (2004)

Individual Investor-

Education LevelEducation level of informal investors in Shenzhen (2004)

Individual Investor-

Education LevelFrom the graph, Informal investors in Hong Kong are mostly

secondary-school educated. Informal investors in Shenzhen are mainly

university- educated.

Explanations for this phenomenon:Explanations for this phenomenon: -entrepreneurial tradition in Hong Kong push

ordinary people into informal investment -less educated entrepreneurs in Hong Kong -Shenzhen entrepreneurs with higher education

Individual Investor-

Labor Force StatusMost informal investors, no matter in

Hong Kong or Shenzhen, have a full-time job (7+ hrs/day).

→more stable income

Individual Investor-

Occupation(2004)

Individual Investor-

OccupationOccupation of informal investors in Shenzhen (2004)

Individual Investor-

OccupationBy comparison,Shenzhen informal investors highest income group in societyHong Kong informal investors

less educated less privileged jobs

Hong Kong housewives more active (the long-existing custom of “everybody-

do-investment” in Hong Kong)

Individual Investor-

Household IncomeHousehold Monthly Income of Informal Investors in Hong Kong (2004)

Individual Investor-

Household IncomeHousehold Monthly Income of Informal Investors in Shenzhen (2004)

Individual Investor-

Household Income

Monthly

income per year

GDP per

capita (2003)

RICH

people!!

Characteristics of investment-

Informal Investment vs Classic Venture Capital

Important!

Characteristics of investment-

Average amount of investment

Characteristics of investment-

Average amount of investment

Characteristics of investment-

Average amount of investment Similar trend of distributionSize of investment mostly not large

The largest division of invested amount is below $50,000 in Hong Kong and Shenzhen. (33% vs 41%)

Possible causes:Possible causes:1.Higher income level in Hong Kong than in Shenzhen2.Lower start-up costs in Shenzhen than in Hong Kong

Characteristics of investment-

Industries of Investment

The most popular invested industry: consumer oriented sector i.e., retail, hotels and / or restaurantsThe least invested industries: extractive industries & business services

The profile of invested industries largely resembles that of start-up businesses.

Characteristics of investment-

Industries of Investment

Characteristics of investment-

Relationship between Investors & InvesteesHong Kong

Shenzhen

Characteristics of investment-

Relationship between Investors & Investees

Relationships between Informal Investors and Investees in All Nations (2003-4)

Compared with other nations, both in HK & SZ,

More friends or neighbors;Less family members or relatives.

Characteristics of investment-

Relationship between Investors & Investees

Some likely causes:Some likely causes:Friendship is particularly important to

Chinese.Investees lack support from other sources.The population composition of Shenzhen--

0nly 30% Shenzhen permanent residentsInadequate legal support and incentives to

facilitate wealthy individuals to make investments

Characteristics of investment-

Relationship between Investors & Investees

The role informal investors play is much like “angels”:

They provide funds to start-up SMEs.Almost half of HK informal investors Just over 1/3 of SZ informal investorsGenerally, HK investors expect returns from their

investments much less eagerly than SZ investors.They stimulate the informal investment →

stimulate the entrepreneurship.

Expect Expect zerozero returnsreturns！！

How to increase informal investmentInformal investment is importantBased in the characteristicsSuggestions to increase in both Shenzhen

and Hong Kong

Common SuggestionsEducators, Public Media can give more

attention to informal investment. e.g. Details about Informal Investment

-importance -information -guidance

Common SuggestionsProfessionals help to bridge the gap

between entrepreneurs and informal investors

e.g. Banks, Lawyers -professional knowledge -wide span of networks

Common SuggestionsInformal investors associations and

committees Both in Hong Kong and the Pearl Delta, people

seldom invest to strangers. - culture - riskAssociations can share risk and learn from each

other. Informal investors at most organize a handful of

associations and networks e.g. Bands of Angels in the U.S

Suggestions to ShenzhenImprove the legal system - enough legal support

- powerful institutional supervision

Improve business ethics -moral education -self discipline -public media’s strong influence

Make a closer family tie -- In other countries, investment from family is important.

-- It is low in Shenzhen and Hong Kong, especially in Shenzhen.

Encourage more people to invest - In Hong Kong, the percentage of high-educated invest is low.

Steer more high-educated people into investment in Hong Kong

Suggestions to Hong Kong

Suggestions to Hong KongDevelop potential industries

*Hi-tech industry

About 50% of informal investors in Hong Kong invested in consumer oriented sectors.

Try to make them invest in other industries

Government policy

Reference Kevin Au and Michael Kwan (2005). Informal Investors in

Hong Kong and Shenzhen ─ Findings of the Global Entrepreneurship Monitor. Hong Kong: Chinese University of Hong Kong

Global Entrepreneurship Monitor ─ Hong Kong and Shenzhen 2004. Hong Kong: Center for Entrepreneurship, Chinese University of Hong Kong

Liu TC and Chen PC (2007). Business Angel Investment in the China Market. Singapore Management Review, Vol 29 No.2, pp 89-101

http://en.wikipedia.org/wiki/Business_angelhttp://www.businessangels.com.au/about.phphttp://tutor2u.net/business/finance/business_angels.htm

The end.

Thank you for your kind attention!

Q & A