Markets
Take a Flier on a Friend?
Great things can happen when you help start a company. So can total failure.
By Anne Kates Smith, Senior Associate Editor
From Kiplinger's Personal Finance magazine, April 2007
Advertisement
The next time you're in a Wal-Mart, consider how the retailing world would look today had Sam Walton's father-in-law not bankrolled his first store. Imagine the recording business had Ahmet Ertegun's dentist refused to make a $10,000 investment to launch Atlantic Records. And credit Leslie Wexner's aunt for the seed money that funded the small women's apparel shop that morphed into The Limited.
There is no question that money from friends and family is the lifeblood of entrepreneurial ventures. Such informal investing provides more than $100 billion -- nearly 1% of the gross domestic product -- to some three million start-ups each year. By contrast, venture capitalists supply $25 billion a year -- and rarely to businesses in the earliest stages. The typical loan or donation (or a combination of both) from friends and family runs $20,000 to $25,000 per contributor. It's no coincidence that 58% of businesses on a recent list of the fastest-growing companies in the U.S. started with $20,000 or less.
Given the rich lore of killings made by those who got in on the ground floor, it's tempting to invest in a friend or relative who pitches an intriguing idea. Go ahead, we won't stop you. Just make sure you're motivated more by altruism than by avarice because, despite a handful of high-profile successes, chances are you won't make a killing or get your money back in a timely fashion -- and in some cases, you won't get it back at all. But you can give a loved one a leg up, contribute to the economy and give a project you believe in a chance to succeed. And if you do it all in a sensible way, you might come out ahead, or at least minimize the fallout and keep Thanksgiving a pleasant occasion.
A forgiving demeanor is paramount. Over the course of six years, retiree John Collins, 69, put $750,000 and countless hours of sweat equity into daughter Misti Collins Smith's pizza parlor, in Bloomington, Ind., only to lose it all when the eatery shut its doors in 2005. Real estate woes, sub-par employees and mercurial customers plagued the restaurant. "I took it in stride," says Collins, who was self-employed, primarily in construction, for 30 years. "If I'd said, 'No,
I'm not going to help you,' she'd have always thought she could have made it." With substantial savings, Collins can afford a "charity begins at home" philosophy. Still, he hopes the contributions he's making to a son-in-law's new campground will fare better.
A winning bet
Success can sometimes seem downright arbitrary. Mike Andrews, 62, invested in a high-tech venture in the late '90s put together by his son Scott, Scott's childhood buddy Peyton Anderson and a couple of their friends. The company sold scientific equipment and materials over the Internet. Andrews had coached the boys' Little League team and recalls Anderson saving a playoff game with a diving catch. "I know nothing about technology. I invested 100% because of Peyton and my son," Andrews says.
He put "tens of thousands" of dollars into shares of SciQuest, both before and after it became a hot new stock in the high-tech bubble days. Because of stock-sale restrictions on early investors, Andrews could sell only 7% to 8% of his holdings before the bubble burst and shares of SciQuest collapsed. Even so, he earned back what he put in many times over. Andrews is now an investor in Anderson's new venture, a biotech firm called Affinergy.