Why a family/friends startup round of funding may not be a good idea
Fundraising activities tend to follow a standard roadmap. It often, but not always, looks like this.
Founders -> FFF round → Angel Investors → Venture capitalists → Exit event
Technically, founders are one of the “F”s in the FFF (family, friends, founders) round. But I listed them separately, and first because in my opinion founders should be the first investors to have skin in the game.
Many of the startup founders I know never bother trying to raise an FFF round. They tend to skip right over that phase and jump straight to angel investors. This happens for a variety of reasons. Maybe they don’t think anyone in their family has investable assets.
Let’s look at some other reasons you should raise an FFF round.
You are afraid to damage your personal relationships
Being in business with family members can be tough. I have personally done it multiple times and am in the middle of launching a new family venture.
My own experiences have been good. That is largely because of the way our family arranges business operations. For example, I always insist that we lay out everything possible in our operating agreement. That way, when tough decisions arise, there is no debate about how we will handle certain things.
But, we have all heard the horror stories of how family members became estranged because of issues with a family business. Imagine the strain that you can put on your own family and friend relationships if you raise money from them and fail. That thought is one of the reasons many startup founders avoid raising an FFF round.
You are bad at managing your own money
When you raising money from family and friends you are responsible for managing the use of that money in the best way possible. That means making it last as long as possible and only using those funds on things that will improve the value of your business.
If you do not have a good track record of managing your own money then it probably isn’t a good idea for you to be managing other people’s money.
You don’t have a well-defined plan for the funds
In every decent pitch deck, you should be explaining to your potential investors the areas where you plan to use their investment. That usually includes things like marketing, research, travel to meet with clients, etc.
However, what I often see is a startup founder who has no detailed plan as to where they will use the capital. Raising money from family and friends is a terrible idea if you have not done the work to understand where you will put that money to use in the first place.
You aren’t committed
If you consider yourself a “serial entrepreneur” please stop using that term. To me, a serial entrepreneur is someone who serially starts new ventures and never sees them through to fruition.
That type of personality, someone who loves to create things but never brings them to the market, is not the type of founder who needs to be raising money from family and friends. They will most likely only waste their investor’s money.
If any one of those reasons is even remotely close to the truth then you need to question whether an FFF round is right for your startup. The good news is that, if you are honest with yourself, that all of the above reasons are something that you can address.
For example, if you aren’t good at managing your own money, you could bring on board a co-founder that has a strong financial background. If you aren’t committed you could always be upfront about your intentions to help get the business off the ground but then bring in someone else to run the venture going forward.
Transparency and honesty really is the best way to do business with family and friends. Make it clear at the very beginning that you intend to keep your personal and business lives as separate as possible.
By putting everything in writing you are one step closer to avoiding any hurt feelings.