Chapter 7 analysed the debt finance of entrepreneurial ventures. While debt is the dominant form of external finance for most start-ups, many entrepreneurs also tap alternative sources of external funding. These include equity finance; informal sources of capital such as friends and relations; micro-finance and credit co-operatives; and trade credit. Sometimes, debt finance is unavailable, especially for entrepreneurs who lack collateral and propose investment projects comprising few tangible assets, high levels of risk and long development periods in which debt claims cannot be serviced. Banks typically do not finance entrepreneurial opportunities of these kinds; equity providers and other types of financiers do.

Equity finance comprises both formal and informal venture capital. An extensive literature now documents the role of equity finance in funding high-growth and hightech entrepreneurial ventures. Formal venture capital has been used to finance such well-known companies as Apple, Google, Amazon, Federal Express and eBay, among others. Equity finance, especially formal venture capital, tends to be ‘narrow but deep’, in the sense that few entrepreneurs use it but those who do can access large sums of funding from it. More widespread, but usually offering much more modest amounts of finance, are informal sources such as friends and family members, as well as micro-finance schemes.

Mason (2006) cites survey responses from eighteen of the GEM countries which estimate that 3.4 per cent of adults are informal investors (either ‘business angels’ or friends and family).