“Love money” is a friendly way to describe an investment made in budding entrepreneurs by those with the closest connections to them: family and friends.
But love money is also serious money for funding businesses in this country. A whopping $10 billion a year is invested in new companies in Canada using informal financing sources, and of that amount about $8 billion comes from family and friends, said Dr. Allan Riding, the Deloitte professor in the management of growth enterprises department at the University of Ottawa’s Telfer School of Management. The remaining $2 billion comes from angel investors, experienced entrepreneurs who back new firms.
Dr. Riding said investments from family and friends are vital to the economy. While many of the funded companies are small-scale and local, with modest revenue, Toronto real estate firm Evton Capital Partners grew a multimillion-dollar company.
“It’s not the norm,” Dr. Riding said. “We don’t have research that tell us the dynamics of family and friend investments (whether they are becoming more sophisticated) and whether change is involved. Family and friends is such a mixed bag. I would say (Evton) is on the extreme end, in a good way for them.”
Evton Capital was established in 1995 by Michael Bunston and his partner, Bill Evans, to focus on the purchase of commercial B-class real estate, older but serviceable office buildings in the Greater Toronto and southern Ontario region.
Mr. Bunston said its approach succeeded because of previous experience and from showing investors that they themselves would be taking on some of the financial risk.
“We really grew our business on that model (of family and friends). We had a good track record and we had all these long-standing relationships who like the commodity of real estate. Obviously the trust factor between us and our investors was there because they had known us for a long time and had seen us do business successfully,” Mr. Bunston said.
An initial purchase of property in Brampton, Ont., led to the involvement of two investors who were close friends of the partners. Commercial B-class properties were thought to be poised for growth after long stagnation, and over the years, Mr. Bunston said, the success had a snowball effect. The key, he added, was to continue to involve more family and friends who wanted property in their portfolios, and who trusted the partners’ business skills and ideas.
“The sales process becomes tough if you are having to educate them on the commodity of real estate,” Mr. Bunston said. “The next project brought in a mix of family and friends who wanted to become involved, first five people, the next one 10. If you have positive results you get referrals.”
Their price points for purchases, Mr. Bunston said, has been between $5 million and $50 million, with the company now valued at $77 million after acquisitions made this year.
A fund was established by the firm in 2005 “to provide investors with tax-effective cash flow and long-term capital appreciation,” with family and friends given key opportunities and roles in investing in it. The quarterly distribution paid out to investors is a return of their original capital, Mr. Bunston said.
Was it a challenge to bring in investors with an emotional tie to the partners? Mr. Bunston called it “an opportunity.”
“We just worked out fannies off, 24/7,” he said, laughing. “We made sure we did the right things, and what we said we were going to do we did. We’ve never lost money for our investors, but when we were in a situation where a deal wasn’t going according to plan we’d communicate this to our investors, what went wrong and what we’d do to fix it.”
That’s where the trust factor was essential, he added. Their success is now leading to further growth on a wider scale, beyond family and friends, with the aim of raising $20 million for future projects, starting in October.
Dr. Riding said Evton Capital set a good example for the development of a more sophisticated approach to the family and friends model. “The more successful models we can illustrate, the fewer failures we are going to have. People learn from the successful models.”
Dr. Riding co-authored a federal study in 2006 on informal financing of small and medium-sized enterprises. Covering businesses started in 2004, it is the most current information available on informal financing. He said statistical information on the two segments of informal financing – family and friends, and business angels – is generally poor.
“It’s not a well-researched topic. There is a growing body of work on it. Internationally, we are only just coming to an agreement of what informal investment and financing means.”
While as a group of informal investors “family and friends” was an eponymous description, Dr. Riding described business angels as wealthy investors who can provide start-up capital and mentorship to a business. “This is way more than venture capital invests in early stage firms.”
Venture capital gets most of the media ink, he said, but informal financing has a great impact on start-ups. One reason, he said, is because they are hard to pin down.
“You can’t go to the Yellow Pages and look under business angels or family and friends.”
The two types of informal investors are quite distinct.
“Angels tend to be repeat players, funding and mentoring multiple times. Family and friends, for the most part, tend to be one-off investments. You make an investment in your son or your daughter, and it’s opportunistic. It’s not year by year, three or four investments per year.”
The rates of return for business angels were good, Dr. Riding said, as they made money more often than they lost it. Rapid growth was also an aim for these investors, while family and friends typically just want to see the company survive in the long term. Family and friends typically lose money more than they make it: It is, he agreed, a labour of love.
“Family and friends, typically, have not been through the process of building a successful company. They are able to provide financial investment but not usually the networking, the mentoring, the business experience. It’s an emotional investment as much as anything else.”
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