WHEN BILL FRITSCH started his own advertising firm in September 2001, he didn’t even consider talking to venture capitalists. Instead, the refugee of the dot-com bust – who has spent the past twodecades in advertising – created a list of 20 friends, family members and former clients who could help him jump-start the new business.

Fritsch got lucky. The first name on his list was a former client who agreed to provide a $250,000 unsecured loan.

“I have never been so shocked in my life,” said Fritsch, president of Seattle-based Hydrogen Advertising.

“It was a special vote of confidence.”

Although most entrepreneurs don’t receive a $250,000 check in their first attempt, Fritsch’s method of raising money is not uncommon.

According to a report released this week by the Kauffman Foundation and Babson College, the majority of entrepreneurs receive their first dose of capital not from VCs but from friends and family.

These informal investments accounted for an estimated $104 billion last year, more than double the $40 billion that venture capitalists invested in U.S. companies.

“Small investments primarily by the so-called 4Fs – founders, family, friends and foolhardy strangers – are crucial in funding not only micro-companies but also future superstars,” the report said.

Typically, the investments are small – less than $5,000 – and originate from a relative’s checkbook. According to the report, 51 percent of informal investors are family members, 27.7 percent are friends or neighbors and 8.6 percent are work colleagues. Nearly one in 20 U.S. adults have invested in an entrepreneurial company, a rate that is surpassed only by Norway, Korea, China, Thailand, Mexico and Iceland, according to the research.

The importance of these informal investors was also highlighted in research by Inc. magazine, which found that only 2 percent of the fastest-growing private companies of 2002 started with venture capital financing. It also showed that 51 percent of the Inc. firms started with less than $20,000.

Relying on acquaintances to finance a business is nothing new in the start-up world.

But with the recent slump in venture capital financing, coupled with a more conservative approach by VCs who want to see paying customers before investing, friends and family are becoming a more important link in the start-up food chain.

It was vital for Dorina Ilisan, a registered nurse who founded Ideal Adult Family Home in 1995.

After failing to secure a bank loan for the Issaquah nursing home, Ilisan turned to her parents for $10,000.

“I don’t think we would have gotten started without that,” said the 31-year-old entrepreneur. “We were in such a situation that $10,000 was a lot of money.” Now, the business is profitable and growing.

Heidi Neck, an assistant professor of entrepreneurship at Babson College and a co-author of the report, said venture capital gets a lot of attention. But informal investors – parents, neighbors and friends – serve as an important engine for new business growth in this country.

“We always are talking about VC, VC, VC,” Neck said. “But if you look at the percentage of companies that are actually getting VC funding, which is 2 percent or less, we are devoting a lot of attention to them and not devoting enough attention to the thousands of firms that are looking for funding that will never get VC funding.”

In order to keep the United States at the top of the entrepreneurial pack (it ranked 11th among the 37 countries surveyed and first among the G7 countries with 10 percent of the population involved in start-ups), Neck said it is necessary to promote and research the role of informal investors.

“I don’t think in the public press that we devote enough attention to how we get funding besides venture capital or banks,” she said. “Sometimes for a person that is just starting a new business that seems daunting or overwhelming.”

Advertising executive Fritsch, whose profitable firm now conducts campaigns for Precor and Da Vinci Gourmet, said he is happy with the decision to shun venture capital.

“Working for a dot-com, I ended up learning a lot about capital,” said Fritsch, a former employee at Freeshop.com. “And I also learned how precious it is to be able to run your company without people with different interests breathing down your neck.”

P-I reporter John Cook can be reached at 206-448-8075 or johncook@seattlepi.com. For more information on Seattle-area start- ups or venture capital firms, visit www.seattlepi.com/venture.