The informal investor in Spain according to the GEM Entrepreneurship Monitor

Ignacio de la Vega, Cristina Cruz, Alicia Coduras and Rachida Justo. Professors IE Business School

8 October 2008

Little by little, the Spanish are starting to see the importance of funding external business projects, although most will still only back friends and family when it comes to new business initiatives.

Ever since the launch of the Global Entrepreneurship Monitor (GEM Project) in Spain by IE Business School, the study of the figure and contribution of the informal investor or non-professional business angel to the development of business initiatives has provided a great deal of information. During the early years, the study focused directly on measuring how many people in the working population (approximately 18 to 64 years of age) invested in others´ business initiatives. Since then, the field of study has been extended and the number of entrepreneurs who declare that they have received part of their initial capital from non-professional investors has also been measured. Finally, in 2007, the awareness of the working population in general of this form of investment was also measured.

Taking the year 2002 as a reference, the percentage of residents of between 18 and 64 years of age in Spain who have acted as informal investors has varied around 2.5-3.5% of this sector of the total population.

The lowest percentage of participation corresponds to the year 2005, with 2.48%, and the highest to 2003, with 3.40%. Since the year 2005, the participation of family members, friends, acquaintances, professional colleagues and even strangers in the finance of a new business idea has continued increasing and now far exceeds the 2002 figure. Evolution of the percentage of residents in Spain of between 18 and 64 years of age who have acted as non-professional business angels (or informal investors) during the period 2003-2007. The most recent figure obtained by the GEM Monitor (3.22%) estimates that approximately 843,000 people acted as informal investors in the year 2007.

The profile of non-professional investors in 2007 is as follows:

Probably male, since 61.8% are men and 38.2% are women. His average age is around 40.5 years old. Significant numbers (34.6%) have higher qualifications. Most are working (78.5%) and, in more than half the cases, they are self-employed (53.3%). They place their average monthly income at between €1200 and €1800 (22.1%), although the rate of people choosing not to answer questions on income is always very high and cannot be considered representative.

The informal investor lives predominantly (87.9%) in urban areas (more than 5,000 inhabitants).

Although most of them are not entrepreneurs, just over a quarter are related to the business or entrepreneurial world. 5.9% are entrepreneurs with nascent businesses (0 to 3 months on the market), 7.5% fledgling companies (from 3 to 42 months on the market) and 12.3% consolidated entrepreneurs (more than 42 months on the market).

Furthermore, 20.6% declared that they are considering starting up a business in the next 3 years and 3.6% are not sure. Consequently, there is another significant part of the group that is not unfamiliar with entrepreneurial activity as a professional option.

5.6% have abandoned or closed a business in the 12-month period prior to July 2007. The reasons for abandonment are analysed in detail in the GEM report and it has been possible to confirm that many of these abandonments are not closures but rather sales, transfers and retirements.

More than 40% consider that there will be good opportunities for business in their area in the next six months and most state that they have the necessary know-how and skills for setting up a business, at least a small business (65.9%). In addition, for more than half of them, the fear of failure is not an impediment for setting up a business (57.2%).

In 54.2% of cases, the investor has a direct family relationship with the beneficiary and only 1.7% invest in projects that are being set up by strangers.

The average investment made by Spanish business angels in 2007 was €17,000, with a typical deviation of 25,200. The minimum investment was €1000 and the maximum was €240,000. The median, the most representative average, was around €10,000.

Most of the business angels (36.3%) do not expect any return on their investments, while 31.5% expect the return of the capital they invested.

The type of business in which they invested in 2007 varied greatly, with a clear predominance of investment in bars, restaurants and similar, commercial businesses, businesses focused on consumers, personal services, enterprises and those related to the primary sector.

From the entrepreneur´s point of view, the 2007 edition of the GEM report has recorded a significant increase (inflation-adjusted) of the seed capital required to set up an enterprise. This figure, together with the stability observed with regard to self-financed funds, reveals to a greater extent the relevance of outside sources of finance as support for the entrepreneurial process. The GEM project allows a breakdown of said sources to ensure a more detailed analysis of the origin of these funds.

The results shown in Table 1 (below) indicate that, even though there are changes between the different editions of the GEM report regarding the distribution of each component, the informal finance from the environment closest to the entrepreneur, which in the Anglo-Saxon world is known as the ‘3Fs’ (Family, Friends & Foolhardy), represents a substantial part of the funding for new projects. This funding is often essential for covering the financial gap faced by entrepreneurs. More specifically, in 2007, 21.2% of entrepreneurs declared that they had received funds from their closest environment, either from relatives, friends, work colleagues or others. Although we cannot indicate the source exactly, 7.4% of entrepreneurs recognized that they received funds from strangers or others. A substantial part should correspond to professional business angels or risk capital, which is the same as private investors who usually take minority holdings in projects at start-up stage, providing not only capital, but also experience in business management.

To conclude, as explained at the beginning, in 2007, the Spanish GEM Monitor included a question for the first time in order to find out the reaction of the population in general when asked to invest capital as if they were informal business angels. As shown in the table, 28% of the population would never invest money in a third-party project. The rest of the population is separated more or less equally between those who would do so depending on the applicant´s identity, more specifically on their relationship with him, and those who would be led by purely entrepreneurial criteria, analysing the viability of the project before investing. Consequently, the working population of Spain is reasonably aware in this area, contrary to the initial suppositions of the researchers that draw up the annual GEM report.

Consequently, as it is the first time this area has been researched, the result obtained has come as a pleasant surprise, since most of our working population is at least not indifferent and would invest, albeit carefully or depending on the ties they have with the beneficiary.

The information summarised here shows for yet another year the huge importance of the family environment in the field of entrepreneurship in Spain, together with a slow development of the figure of the professional business angel who invests in third-party businesses in which he/she has no relationship with the entrepreneur, a profile that is much more developed in the Anglo-Saxon world.


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