Informal Investment

Monday, April 16, 2020. Written By: The Global Entrepreneurship Monitor (GEM)

Informal Investment

Monday, April 16, 2020. Written By: The Global Entrepreneurship Monitor (GEM)

The act of starting a new business requires resources, including access to finance.

Many news sources, particularly in developed economies, characterize those starting new businesses as building smartphone applications using high technology in open-plan offices, presenting pitches to venture capitalists, in a world of high finance and initial public offerings. In practice, new businesses are more likely to be started with the entrepreneur’s savings, credit cards or overdrafts, or with loans from family and friends. Informal investment is when an individual provides funds for a new business started by someone else, and is typically from family, or friends and other acquaintances.

In its 2019 Adult Population Survey (APS), GEM asks individuals if they have invested in a new business started by someone else, and if so how much they invested, and what is the relationship to that person. Figure 6.1 shows the proportion of adults in each economy that, in 2019, have both invested in someone else’s new business at any time in the past three years and stated how much they provided.

The proportion of adults investing in someone else’s new business is less than 2% in 10 of the 50 economies, but more than 5% in 17 of those 50. Rates of informal investment are highest in Latin America & Caribbean (more than two in 10 in Chile; more than one in 10 adults in Guatemala), in the Middle East & Africa (around one in 10 or more in Qatar, Oman and Saudi Arabia), and in Europe (just under one in 10 in Switzerland). These figures show Chile as a dynamic entrepreneurial economy, both in the process of starting businesses (almost four in 10 adults), and in investing in other people’s enterprises (two in 10 adults) (READ MORE…).

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