302 ENTREPRENEURSHIP
- Is actually considering making an investment. Investors who are not liquid or have no
desire to invest are unapproachable—no matter how rich they are. - Has the right amount of money to invest. An investor with too little money cannot
buy into the deal. An investor with too much money may view this deal as trivial. - Is interested in the business. Investors should share some of the founders’ enthusiasm
and optimism about the business’s prospects. - Has knowledge that can help the new venture. Counseling from an investor with expe-
rience, expertise, or network resources is ideal. The investor may be savvy about the
business or industry, may be knowledgeable about the geographic area where the
business will operate, and may know other individuals interested in investing. - Is reputable and ethical. The investor’s reputation is part of the new venture’s
reputational capital. Ethical standards are important because investors could take
advantage of inside information or manipulate their investment to the entrepre-
neur’s disadvantage in a potential conflict of interest. - Has a good rapport with the top managers and founders. The ability to communicate
freely, to get along and see the situation from the founder’s point of view can go a
long way to easing strain between management and investors. - Has experience in this type of investing. Because of the wide swings in performance
and emotions that are part of the entrepreneurial process, investors who know what
to expect and can hang on for the duration are most desirable.^5
Investors with all these characteristics are rare, valuable, hard to duplicate, and nonsub-
stitutable human resources that can provide sustainable advantage for the firm.
The ideal investor may be found in any of three primary investor groups:- Friendly investors—family, friends, business associates, potential customers or sup-
pliers, prospective employees, and managers. These informal investors are the pri-
mary source of financing for most business start-ups. According to the Kauffman
Foundation, 44.6 percent of friendly investors are close family members and 27.7
percent are friends or neighbors.^6 - Small outside investors—wealthy individuals (e.g., doctors, lawyers, business-
persons) and angels. - Formal or professional investors in the venture capital industry.
Hal Bringman is an example of a friendly investor, but he isn’t a cash investor. He and
his partner are very successful public relations executives. Their firm takes equity in
exchange for services that are too expensive for the entrepreneur to afford. When
Fabrice Grinda asked them to handle public relations for his new start-up, Zingy, they
decided to take a chance on becoming equity owners. Why? Zingy (a provider
of downloadable ringtones) had enormous potential in a very hot market. And did
the exchange pay off? When Grinda sold Zingy to a Japanese company for $80 million,
they were “making a lot more money than if they had taken fees,” Mr. Grinda report-
ed.^7
In another example, professional investors were a source of outside funds and expert-
ise for Software Artistry, Inc., a fledgling developer of artificial-intelligence software
packages. The Indianapolis venture capital firm CID Equity Partners invested a total of