Informal Investment


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Informal Investment

  1. 1. Presented by Group 2 Nancy Minnie Allen
  2. 2. Outline
  3. 3. ? What can I do? Situations faced by start-ups…….. No capital ! No fund !
  4. 4. ? No fund ! No capital ! Common methods for raising fund……..
  5. 5. <ul><li>Banks </li></ul><ul><li>* usually ask for collateral or personal guarantees </li></ul><ul><li>Venture capital funds </li></ul><ul><li>* the only formal investment vehicle for financing start-ups </li></ul><ul><li>aim at later stages but show little interest to start-ups </li></ul><ul><li>Government funding programs </li></ul><ul><li>* limited capability </li></ul><ul><li>…… </li></ul>Formal investors ? (╯╰) …….
  6. 6. business angels !
  7. 7. Informal investor <ul><li>An affluent individual who provides capital and fund for a business start-up / beginner </li></ul><ul><li>including immediate family, friends, colleagues </li></ul><ul><li>and strangers </li></ul>Definitions “ F F F” (family, friend and ? ) High risk ! “ fool”
  8. 8. More details <ul><li>Informal investors need to undertake high risk. </li></ul><ul><li>“ F F F” (family, friend and “fool”) </li></ul><ul><li>Many would like to choose those companies that have potential to develop and promise the greatest return. </li></ul><ul><li>Informal investors generally use their own money. </li></ul><ul><li>The capital is in small amount. </li></ul>
  9. 9. Importance <ul><li>Informal investors provide much more investment than venture capitalists. </li></ul><ul><li>informal capital 34.2% </li></ul><ul><li>venture capital 0.01% </li></ul>-Increase capital liquidity -Benefit a large number of enterprises
  10. 10. Importance <ul><li>Informal investors usually aim at start-ups or early growth companies, providing seed fund and capital. </li></ul>-Stimulate the development of early growth enterprises -Strengthen the market confidence for start-ups
  11. 11. Importance <ul><li>Good combination of capital and experience </li></ul><ul><li>Informal investors always sit on board and even take part in business operation. </li></ul><ul><li>- help in strategy </li></ul><ul><li>-find appropriate managers </li></ul><ul><li>-provide valuable advice on management, finance and other matters </li></ul><ul><li>-link distributors and suppliers </li></ul>-Give enormous encouragements -Mean a lot to those start-ups that often lack experience
  12. 12. High risk! Why they come? <ul><li>Angel investors are not only those that want to maximize their wealth in a “high risk” “high return” way...... </li></ul><ul><li>but often include retired entrepreneurs or executives, who are interested in angel investment for reasons that go beyond pure monetary return...... </li></ul>
  13. 13. <ul><li>Other purposes: </li></ul><ul><li>* keep pace of current developments in a particular business area </li></ul><ul><li>*mentor another generation of entrepreneurs </li></ul><ul><li>*make use of their experience and networks to help flourish an industry </li></ul><ul><li>…… . </li></ul><ul><li>Much can be done by community associations, school networks, religious groups and charitable organizations. </li></ul>not only “angels” for business, but also meaningful to the country and the society High risk! Why they come?
  14. 14. <ul><li>Individual Investor </li></ul><ul><li>Gender composition / Age / Education level / Labor force status / Occupation / Household monthly income / ··· </li></ul><ul><li>Features of Investment </li></ul><ul><li>Informal investment VS Classic venture capital / Average amount of investment / Industries / Relationship between investors & investees / ··· </li></ul>Different Roles of Informal Investors in HK & SZ
  15. 15. HK SZ Prevalence Rate of Informal Investors (2004)
  16. 16. Individual Investor- Gender Composition <ul><li>Informal investors in Hong Kong share nearly the same number of males and females; </li></ul><ul><li>while in Shenzhen, about 2/3 of them are males. </li></ul><ul><li>Sources: GEM Hong Kong and Shenzhen 2004, Centre for Entrepreneurship, the Chinese University of Hong Kong </li></ul>Male (%) Female (%) Hong Kong 50 50 Shenzhen 66.7 33.3
  17. 17. Individual Investor- Age HK vs SZ informal investors by age (2003-2004)
  18. 18. <ul><li>We can see from the graph: </li></ul><ul><li>1/3 of informal investors in Hong Kong are between the age of 35-44, similar to other countries around the world. </li></ul><ul><li>Shenzhen’s informal investors are generally younger than Hong Kong’s. </li></ul><ul><li>possible reasons : </li></ul><ul><li>in Shenzhen, the younger generation the rich willing to invest in new venture make informal investments </li></ul>Individual Investor- Age
  19. 19. Individual Investor- Education Level Education level of informal investors in Hong Kong (2004)
  20. 20. Individual Investor- Education Level Education level of informal investors in Shenzhen (2004)
  21. 21. Individual Investor- Education Level <ul><li>From the graph, </li></ul><ul><li>Informal investors in Hong Kong are mostly secondary-school educated . </li></ul><ul><li>Informal investors in Shenzhen are mainly university- educated . </li></ul><ul><li>Explanations for this phenomenon: </li></ul><ul><li>-entrepreneurial tradition in Hong Kong push ordinary people into informal investment </li></ul><ul><li>-less educated entrepreneurs in Hong Kong </li></ul><ul><li>-Shenzhen entrepreneurs with higher education </li></ul>
  22. 22. Individual Investor- Labor Force Status <ul><li>Most informal investors, no matter in Hong Kong or Shenzhen, have a full-time job (7+ hrs/day). </li></ul><ul><li>-> more stable income </li></ul>
  23. 23. Individual Investor- Occupation (2004)
  24. 24. Individual Investor- Occupation Occupation of informal investors in Shenzhen (2004)
  25. 25. Individual Investor- Occupation <ul><li>By comparison, </li></ul><ul><li>Shenzhen informal investors </li></ul><ul><li>highest income group in society </li></ul><ul><li>Hong Kong informal investors </li></ul><ul><li>less educated less privileged jobs </li></ul><ul><li>Hong Kong housewives </li></ul><ul><li>more active </li></ul><ul><li>(the long-existing custom of “everybody-do-investment” in Hong Kong) </li></ul>
  26. 26. Individual Investor- Household Income Household Monthly Income of Informal Investors in Hong Kong (2004)
  27. 27. Individual Investor- Household Income Household Monthly Income of Informal Investors in Shenzhen (2004)
  28. 28. Individual Investor- Household Income Monthly income per year GDP per capita (2003) RICH people!!
  29. 29. Characteristics of investment- Informal Investment vs Classic Venture Capital Important!
  30. 30. Characteristics of investment- Average amount of investment
  31. 31. Characteristics of investment- Average amount of investment
  32. 32. Characteristics of investment- Average amount of investment <ul><li>Similar trend of distribution </li></ul><ul><li>Size of investment mostly not large </li></ul><ul><li>The largest division of invested amount is below $50,000 in Hong Kong and Shenzhen. (33% vs 41%) </li></ul><ul><li>Possible causes: </li></ul><ul><li>Higher income level in Hong Kong than in Shenzhen </li></ul><ul><li>Lower start-up costs in Shenzhen than in Hong Kong </li></ul>
  33. 33. Characteristics of investment- Industries of Investment
  34. 34. <ul><li>The most popular invested industry: </li></ul><ul><li>consumer oriented sector </li></ul><ul><li>i.e., retail, hotels and / or restaurants </li></ul><ul><li>The least invested industries: </li></ul><ul><li>extractive industries & business services </li></ul><ul><li>The profile of invested industries largely resembles that of start-up businesses. </li></ul>Characteristics of investment- Industries of Investment
  35. 35. Characteristics of investment- Relationship between Investors & Investees Hong Kong Shenzhen
  36. 36. Characteristics of investment- Relationship between Investors & Investees Relationships between Informal Investors and Investees in All Nations (2003-4)
  37. 37. <ul><li>Compared with other nations, both in HK & SZ, </li></ul><ul><li>More friends or neighbors; </li></ul><ul><li>Less family members or relatives. </li></ul>Characteristics of investment- Relationship between Investors & Investees
  38. 38. <ul><li>Some likely causes: </li></ul><ul><li>Friendship is particularly important to Chinese. </li></ul><ul><li>Investees lack support from other sources. </li></ul><ul><li>The population composition of Shenzhen--0nly 30% Shenzhen permanent residents </li></ul><ul><li>Inadequate legal support and incentives to facilitate wealthy individuals to make investments </li></ul>Characteristics of investment- Relationship between Investors & Investees
  39. 39. <ul><li>The role informal investors play is much like “angels”: </li></ul><ul><li>They provide funds to start-up SMEs. </li></ul><ul><li>Almost half of HK informal investors </li></ul><ul><li>Just over 1/3 of SZ informal investors </li></ul><ul><li>Generally, HK investors expect returns from their investments much less eagerly than SZ investors. </li></ul><ul><li>They stimulate the informal investment -> stimulate the entrepreneurship. </li></ul>Expect zero returns !
  40. 40. How to increase informal investment <ul><li>Informal investment is important </li></ul><ul><li>Based in the characteristics </li></ul><ul><li>Suggestions to increase in both Shenzhen and Hong Kong </li></ul>
  41. 41. Common Suggestions <ul><li>Educators, Public Media can give more attention to informal investment. </li></ul><ul><li>e.g. Details about Informal Investment </li></ul><ul><li>-importance </li></ul><ul><li>-information </li></ul><ul><li>-guidance </li></ul>
  42. 42. Common Suggestions <ul><li>Professionals help to bridge the gap between entrepreneurs and informal investors </li></ul><ul><li>e.g. Banks, Lawyers </li></ul><ul><li>-professional knowledge </li></ul><ul><li>-wide span of networks </li></ul>
  43. 43. Common Suggestions <ul><li>Informal investors associations and committees </li></ul><ul><li>Both in Hong Kong and the Pearl Delta, people seldom invest to strangers. </li></ul><ul><li>- culture </li></ul><ul><li>- risk </li></ul><ul><li>Associations can share risk and learn from each other. </li></ul><ul><li>Informal investors at most organize a handful of associations and networks </li></ul><ul><li>e.g. Bands of Angels in the U.S </li></ul>
  44. 45. Suggestions to Shenzhen <ul><li>Improve the legal system </li></ul><ul><li>- enough legal support </li></ul><ul><li>- powerful institutional supervision </li></ul><ul><li>Improve business ethics </li></ul><ul><li>-moral education </li></ul><ul><li>-self discipline </li></ul><ul><li>-public media’s strong influence </li></ul>
  45. 46. <ul><li>Make a closer family tie </li></ul><ul><li>-- In other countries, investment from family is important. </li></ul><ul><li>-- It is low in Shenzhen and Hong Kong, especially in Shenzhen. </li></ul>
  46. 47. <ul><li>Encourage more people to invest </li></ul><ul><li>- In Hong Kong, the percentage of high-educated invest is low. </li></ul><ul><li>Steer more high-educated people into investment in Hong Kong </li></ul>Suggestions to Hong Kong
  47. 48. Suggestions to Hong Kong <ul><li>Develop potential industries * Hi-tech industry </li></ul><ul><li>About 50% of informal investors in Hong Kong invested in consumer oriented sectors. </li></ul><ul><li>Try to make them invest in other industries </li></ul><ul><li>Government policy </li></ul>
  48. 49. Reference <ul><li>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 </li></ul><ul><li>Global Entrepreneurship Monitor ─ Hong Kong and Shenzhen 2004. Hong Kong: Center for Entrepreneurship, Chinese University of Hong Kong </li></ul><ul><li>Liu TC and Chen PC (2007). Business Angel Investment in the China Market. Singapore Management Review, Vol 29 No.2, pp 89-101 </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul>
  49. 50. <ul><li>The end. </li></ul><ul><li>Thank you for your kind attention! </li></ul><ul><li>Q & A </li></ul>