Love money and the crowd

My name is Rudy Aernoudt. I'm Professor at the University of Ghent. The topic in the field of financial management today is Love Money and the Crowds.

Let's start by having an overview about equity. When we speak about equity, we speak on the one hand about private equity and the other hand about public equity. Public is about stock, that be the next course. Private equity, we make a distinction between the formal private equity, such as venture capital and the informal capital, such as business angels, and at the same time, friends, fools and families, and the crowds. Today, the topic will be two parts of informal venture capital, being friends, fools, and family and the crowds.

When we speak about love money, in fact, the origin for once is based in China, where you have what we call, Hui, mean something like being at home. In fact, the principle was that at Friday evening, you go into your favorite pub. The money you earned during the week, you put it in one hat, and those who has projects are looking for money. They put a small post-it in the other hat saying, I'm looking for 100 Euros and I offer friends 7%. At the end, you empty the box with the money and you distribute at those who offer most. If you don't get the money you want, you can come back next week. This system was called Hui and is still applicable today in some villages in China.

This was in fact the basis of what you call Love Money. Of course, love and money at first sight doesn't go along with it means, in fact, that the money is given to the one who has a project based on relation. It's relation between the investee and the investor which was not the case in business angels and which is not the case with venture capital. Of course, here we are speaking about small amounts of money which are mostly used and financed at the beginning or even before the start of a company, and mostly in the form of a loan. It is marginal in the way that small amounts of money, but to give an example, in Europe, 60% of all companies starts by the first investment, which is love money. When we speak about love money, there is a relation between the investor and the investee. This relation can be based on a friendship, or it can be family, or it can be what you call fools, meaning people who has no relation, but just want to invest the money in a company, which even does not exist. That's why we speak about the triple F (FFF) money, friends, families, and fools. The global entrepreneurship monitor, which is made by the Babson College is, in fact, each year trying to see where does the money come from. As you can see on the slide, the most important source of financing is close family. Almost 50% of all the love money is coming from the family relation. The second big source is colleagues, friends, or neighbors, which accounts for 35% of the people and you see the fools are only 6%, just to give an idea.