Friends and Family Round: yes or no?

First off, thanks to Chris for the question. It’s always more fun, and easier, as a writer to answer questions that your readers ask of you. Plus, it lets me know I am adding value by answering the most burning questions you have. So, keep them coming. One easy way to do that is to tag me on Twitter.

The Friends and Family Round

One of the earliest sources of funding for a startup is called the F.F.F. round or Friends, Family, Founders. Outside of using your own income as a funding source asking the people closest to you can be one of the easiest types of funding to raise. Assuming your friends and family have money to invest in your idea. Generally speaking a friends and family round requires less time and energy to close. Although you should treat your friends and family like any other investor, in terms of how present the opportunity to them, their funding decisions are often based on their relationship with you and their trust in you.

Many entrepreneurs are hesitant to raise a friends and family round. This can happen for a variety of reasons. The most common reason I hear is that the founder’s friends and family don’t have they money to invest. Or, they don’t want to be in business with the people closest to them.

Reasons You Should Raise a Friends and Family Round

• It can be fun to work with family — don’t laugh and be snarky. It can be fun to be in business with your family. Sure it can be challenging as well. I’ve experienced family businesses personally and I can tell you without a doubt that it is fun to grow a business together.
• You get to work with people you trust — I find it easier to work with family and friends because there is an inherit level of trust already in place.
• It builds on legacies — getting to work with my mother and brother inside one of my late father’s businesses has given all of us a sense of legacy. We realize we are building something that will last generations and be handed down to his grandchildren.
• Few financial repercussions — if you raise money from your friends and family they aren’t likely to allow you to get into a bad financial position or force you into bankruptcy, unless they asked for a personal guarantee, if the business fails.

Reasons You Shouldn’t

• It can create a rift — being in business with friends and family can be fun. It can also end relationships. Just yesterday I heard of a business partner who is suing a long-time friend. It happens.
• You might lose their money (duh) — let’s face it. No one cherishes the idea of losing their family member’s money and having to tell them the news that the business didn’t work out. The fact is that the failure rate of new ventures is extremely high and the chances are that this might happen. Be sure if you do seek friends and family funding that you only allow them to invest money that they are willing to light on fire.
• It doesn’t validate your business — just because you were able to raise an F.F.F. round doesn’t mean that you have earned investor validation. While it is a good start other investors, from outside your immediate circle of influence, won’t see a friends and family round as proof, like they do when other investors fund a startup, that they should pay attention to what you are doing.

So, what?

The main point here is that you have to weigh the risks versus the benefits of being in business with people that you care about. If you raise a friends and family round be sure that separate out the personal and business relationship as much as possible, that you only allow them to invest money that they can afford to lose and are willing to lose, and that you set firm boundaries about how you will interact as business partners.

Until next time, I hope you “find your voice”.