Take a Flier on a Friend?

Great things can happen when you help start a company. So can total failure.

The next time you're in a Wal-Mart, consider how the retailing world would look today had Sam Walton's father-in-law not bankrolled his first store. Imagine the recording business had Ahmet Ertegun's dentist refused to make a $10,000 investment to launch Atlantic Records. And credit Leslie Wexner's aunt for the seed money that funded the small women's apparel shop that morphed into The Limited.

There is no question that money from friends and family is the lifeblood of entrepreneurial ventures. Such informal investing provides more than $100 billion -- nearly 1% of the gross domestic product -- to some three million start-ups each year. By contrast, venture capitalists supply $25 billion a year -- and rarely to businesses in the earliest stages. The typical loan or donation (or a combination of both) from friends and family runs $20,000 to $25,000 per contributor. It's no coincidence that 58% of businesses on a recent list of the fastest-growing companies in the U.S. started with $20,000 or less.

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Anne Kates Smith
Executive Editor, Kiplinger's Personal Finance

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage,  authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.