Should you raise startup funding from friends and family

Should you raise startup funding from friends and family?

So you think you need to raise funding for your startup? You may be right, but before you being to raise startup funding from friends and family, take a moment to assess whether your startup is ready for investment. It is so much easier to raise investment when you have traction.

Should you raise startup investment from family and friends

There comes a point when all startups need investment. As Founders, we do what it takes to build our startups, to make our vision a reality. We use our savings, we load up the credit card and we bootstrap to fund our startups but if this isn’t enough to get the business to “traction” (the point at which professional investors get involved), the next best option may be to raise startup funding from family and friends.

Startup investment is very likely to come from people you know

There is a lot of anecdotal evidence that a startup’s first funding round will come, predominately, from people known to the business. So speaking to friends and family isn’t a bad idea in itself. People who know you, your skills, strengths and experience, are more likely to believe you can take your startup to the next stage. They know your abilities. They trust you. They are, in effect, backing you.

But, should you do it? Should you raise startup funding from friends and family? Should you take money from your nearest and dearest when there is, inevitably, risk involved. If things don’t go to plan with your startup, will you regret mixing business and personal relationships?

What does it mean to raise startup funding from friends and family?

Before we explore the emotions that arise when you raise startup funding from friends and family, let’s consider the different forms this type of funding might take. Friends and family funding could be:

a gift – with no expectation that the money will be paid back
a loan – perhaps with low or no interest and a long loan period
a commercial arrangement where you offer shares (equity) in your startup in exchange for the cash.

All of these options could give you the cash injection your startup needs but, with the possible exception of money offered as a gift, the money comes with expectations – some of which may be explicit, but not all!

Relationships with friends and family run deep. When you raise startup funding from friends and family the people who back you trust you – with their hard earned cash. Depending on their education, career and financial situation they may not realise the risk they are taking. The implications can be far-reaching.

I know one founder whose father invested in his startup and – when that business failed – the father lost all the money he had invested. As a result father and son didn’t talk for years. Worse still, the father almost refused to attend his son’s wedding. A betrayal of trust isn’t easily forgotten so proceed with caution when raising startup funding from friends and family!

Be clear about the risks

Approach any conversation with friends and family with frankness and honesty. Nine out of ten businesses fail in the first two years of trading. Running a business is challenging and influenced by some factors beyond the Founders control. Make sure anyone making an investment in your startup realises this. Business Angel investors know the risks and are usually in a position to spread their risk across a number of investments. Your friends and family may not be in a position to do this. They may only be backing your startup.

Explain this is a long term investment

There is no quick return on an investment in a startup either. Indeed, if you raise startup funding from friends and family, they are unlikely to see any of that money back for a good few years. Startups don’t pay dividends. Early investors, and this includes friends and family, don’t get their money back until there is an “exit”. That generally means until the startup has grown to such an extent that another business (or other investors) want to buy the business. It takes time (between 5-10years generally) to get to an “exit”. Can your friends and family wait that long for their money back?

Consider the impact of future raises – and don’t over-value today

Then there is the issue of valuation. Valuing any early-stage business is complex but valuing a fledgling startup is very difficult. It is often difficult to know where you start. There is also a risk. If you get the valuation wrong you could end up selling too much of your business at too early a stage. This can then hamper your ability to raise further rounds. As new investors come on board, the Founder and other shareholders become “diluted”. Depending what proportion of shares were sold originally, you may find you no longer own enough of the company to take on new investors and maintain control of the business.

To raise startup funding from family and friends can be a good route

Nevertheless, raising startup funding from friends and family can still be a good option – and may be your only option. But, if you want to stay friends, full transparency and honesty are essential. You have to be responsible about what people are getting involved in. Be open about the risks.

You can enthuse about the opportunity – but you must also level with everyone about the risk. The decision to invest is then theirs to take, or not. It gives your friends and family the opportunity to choose whether or not to invest and at a level that hopefully won’t sour your relationship if things don’t go to plan. It moves the transaction onto a business footing.

Being honest in this way creates space for personal choice, without any feeling of pressure that family and friends might feel to support you at all costs. As the Founder, you must also be willing to accept any answer with good grace, especially if that answer is a “no”.

If you can do that without ranker or grudge it gives you freedom. Freedom to ask almost anyone to consider an investment in your business. And that opens a world of potential investors to you.

******************************************************

Is your Startup ready for investment?

Take the Startup Investment Scorecard to discover if your Startup is ready for investment. Start here

Latest Blog & News

How to weave storytelling into your pitch deck to keep investors’ attention

As founders we’re told to weave storytelling into our pitch deck, but we are not always told why. Luckily Pitch Coach and Funding Accelerator

Is equity funding the best option for your startup?

Equity funding isn’t for everyone. When you sell shares in your business you are, effectively, entering into a long-term relationship with your investors. Investors

3 things angel investors look for in your startup valuation

Funding Accelerator mentor, Tracey Rob Perera, shares 3 things angel investors look for in your startup valuation. Tracey Rob Perera is not only a

How to build productive relationships with investors

You might think closing a funding round is the end of a journey. In fact, its just the start! Now comes the hard work

How to expand your startup team without it costing more

Funding Accelerator expert mentor Chris Booth of Findrs explains how to expand your startup team (and extend your headcount budget) by using AI. When

The state of startup investment in 2022

Today VC Firm Atomico launched their State of European Tech Report for 2022 which identifies trends in startup investment. ** Spoiler alert: The key findings make

Start-up funding adviser, Hatty Fawcett, wins Enterprise Nation Adviser of the Year 2022/23

Over the last few months, start-up founders and small business owners across the UK have been voting for the best and brightest business advisers.

How startup accelerators increase your chance of funding

While I’ve written before about the benefits of joining startup Accelerators (find out more here), now seems like the perfect time to revisit the

3 unit metrics that attract startup investors and build a compelling story of growth

Did the conversation with potential investors fizzle out at the financial stage? It’s not just the vision, but the focus on detail that secures

How to find investors, and impress them

Have you ever wondered what it takes to find and impress investors? Well, who better to ask than leading VCs and angels themselves! Earlier

Investing your time where it counts – the numbers

How the right financial forecast is crucial to unlocking startup investment If you’re looking to secure startup investment, it’s inevitable that at some point

The travel industry tech startup that went from being grounded to accelerating for take-off having secured over £250K investment

Barry Klipp had spent 17 years working in the airline industry so you might imagine how he felt when the covid pandemic grounded planes

Every startup deserves equal access to funding

Our partner, Capital Pilot, is removing bias from the funding process to improve access to funding for all Let’s face it, raising equity investment

Funding Accelerator graduate PEEQUAL secures £250,000 equity investment

British Design Fund became PEEQUAL’s largest investor but the reason they provided equity investment might surprise you… Amber Probyn and Hazel McShane, the two

How to find investors for a startup…quickly!

A recent report from Beauhurst and SFC Capital* reveals that it takes, on average, 15 months to find investors for a startup and close

7 Essentials that unlock Start-up equity investment

Start-up equity investment: Investors look for 7 Essential ingrediants when deciding whether to back a start-up – or not! Be succinct to get attention

Traction makes it quicker to raise funding for a startup

So you want to raise funding for a startup? To succeed, you’ll need to speak the language of investors. Investors will ask “how much

7 Mistakes that stop you raising investment for your startup

Startup founders are resourceful and move quickly but sometimes that haste can work against them. They make mistakes. When it comes to raising investment

“What’s the best way to fund my business?”: Ten founders give the lowdown on the best way to fund your business

One of the fundamental questions at the front of most founders’ minds – and the most frequently asked question – is “What’s the best

Why your executive summary is your most important investment document

When seeking investment for your business it pays to think like an investor, giving an investor the information they want rather than telling them

Raising startup funding in a recession

Focused For Business’ founder Hatty Fawcett recently took part of a panel discussing the topic “Raising in a Recession” which had some practical suggestions.