Funding a Start-up? Friends Lead the Way

University scientists seeking to commercialize their research results most often turn to friends and family for startup funding. Nearly 21% of companies started by professors in fiscal year 2004 received initial funding from friends and family, compared to 10.7% tapped from angels and 5.7% from angel networks, according to the latest survey from the Northbrook, Ill-based Association of University Technology Managers (AUTM).1 Forty-nine percent of funding came from individuals vs. a

Ted Agres
Feb 1, 2006

University scientists seeking to commercialize their research results most often turn to friends and family for startup funding. Nearly 21% of companies started by professors in fiscal year 2004 received initial funding from friends and family, compared to 10.7% tapped from angels and 5.7% from angel networks, according to the latest survey from the Northbrook, Ill-based Association of University Technology Managers (AUTM).1 Forty-nine percent of funding came from individuals vs. approximately 45% received from institutions. "Far from marauding bands of venture capitalists sweeping in and reaping profits from the back of federal research, these data show that most startup funding comes from friends, family, and other individual investors," says Ashley Stevens, AUTM survey editor and director of Boston University's Office of Technology Transfer.

Nearly 460 new companies were started from US university research in fiscal 2004, almost 25% more than in 2003. Friends and families typically invest $10,000 to...

Startup ventures are, by definition, risky, so scientists may want to think twice about spoiling close relations. "Friends and family ? we actually call them friends, family, and fools ? may be enamored with the idea of being investors, but they may not have the skill or knowledge to perform due diligence to assess risks," warns Sohl. "They may not understand the odds are high that they will never see a return on their investment." Tracking success rates of startup companies is difficult because they frequently change names, are acquired or sold, or go dormant, Sohl says. Of the 3,226 university startup companies in existence in 2004, however, only 124 went defunct, according to AUTM. When this happens, says Stevens, "It can make for some very strained Thanksgiving dinners."

tagres@the-scientist.com

Tips for seeking funds from friends and family

While you are dealing with relatives and friends, don't appeal to their loyalties. Rather, try to avoid future personal complications by keeping the transaction on a business level.

Explain that there are no guarantees. Friends and family must understand the high-risk nature of the venture and that there is a strong chance they might not make as much as they anticipated, or might even lose their investments completely.

Try to keep lawyers out of the picture initially, because they add significant transaction costs. At some point you will want a lawyer involved, but not necessarily at the beginning.

If you are seeking loans instead of stock, get a tax accountant involved to make sure the loan terms pass IRS muster.

Source: Jeffrey E. Sohl, director of the Center for Venture Research at the University of New Hampshire-Durham

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