That Friends and Family Round of funding… we’ve all heard we need it, or that that’s where founders start; but are so many really raising money from family? Let’s cut to the chase, overwhelmingly most founders can’t look to family for financial help and so how should we really think of drawing capital from loved ones?
Why You Should Not Raise Money from Family
90% of all businesses fail. Period. The odds that you’re an exception are so outside any other gamble that you’re insane if you think you’ll succeed. Please appreciate that. Entrepreneurs and founders KNOW they will fail. We’re in the business of failing again and again and again, putting money to work, to uncover the few NEW things that will create opportunities and jobs.
Starting a business is NOT a stable career path for ANYONE who isn’t able to handle the failure and loss of capital.
Do not let the success stories, encouragement, and wealth created mislead you… those are the pop culture stories that we want to celebrate, highlighted from among the countless of others that are struggling, failing, and losing money, because they’re inspiring.
Why should you NOT raise money for a business from family?
Because money into new businesses, particularly startups, is more accurately R&D or investment in education/experience.
It is NOT investing in Wall Street or a Rental Property.
If your family is ready to SPEND the money, lose it, so that you can try, learn, and get some experience. GREAT! If they want their money back or you believe you’ll be able to get it back to them, STOP. FULL STOP.
Now, don’t get me wrong… Why should you raise money for a business from among family?
Because that’s still what overwhelmingly most do. Sort of.
The odds of your getting money from anyone else to start something, are so infinitesimally small that society is really misleading people by promoting so much the idea of fundraising.
You will not get funding.
No, granted, not literally, “You won’t get funding, ever.” You might, some day. I’ve raised money. People do raise money. People get grants, bank loans, and investors for business.
The thing to appreciate it that it is NOT common; it’s in fact very rare. And almost NO ONE gets funding from anyone to start out. Heck, I’ve had some success but I doubt I could just get funding to start something new… Elon Musk could, most of us can’t.
You should raise money from your family because that’s how it’s done. Mostly.
What people aren’t really taught about starting a business is that your sources of capital actually look like this, in order of how likely and when you get them…
- Your pocket.
- Your job. Start while working a job and that job pays for everything. Most do this… the idea that people have to quit or focus 100% on a new business is b.s. perpetuated by inspirational speakers and coaches who want to get paid for their advice. Almost everyone starts something while working.
- Your credit cards. No, you shouldn’t go into debt but it is what people do and from where early cash comes.
- Family. Having gotten going, we get help from family.
- Customers. Known as bootstrapping, most businesses get going because people pay them. Notice, we’ve still not “raised money” (have you done all this yet?). Everyone bootstraps. The other misleading advice in today’s society is that “bootstrapping is better” or some such. EVERYONE bootstraps. We ALL are bootstrapping, until some aren’t. No one gets money to start meaning we all bootstrap until some are able to do otherwise.
- More formal debt… bank loans or second mortgages. Absolutely don’t do this until you’re making some money. Good chance you shouldn’t do it at all but here’s where it fits in the spectrum.
- Business partners. NOT Angel Investors. NOT business investors. You first get some other capital from others by making them partners/co-founders so that you’re not footing all the costs yourself. (Notice, we’ve STILL not raised money).
- Angel Investors OR Business Investors depending on what you’re doing. Most likely in the form of a note first (convertible debt) rather than an investment. These two investors are NOT the same.
- An Angel refers to the person who knows your industry, wants to pay it forward, and is investing in ownership of something new (startup). They know they’re likely to lose their money.
- A Business investors refers to the personal also at this stage but that person who behaves differently. They want to see revenues, customers, and cash flow. They want more security and assurance that they’re investing in a “Business” not a “startup.”
- That distinction is important to make with people because way too many people with money will say they are startup/angel investors when they’re really just business investors who say they’re angels because you’re early and it sounds cool. Make sure they (or you) distinguish between them!
- Venture Capital. My answer is already long and you’re not here yet so we’ll leave the bullet points at this so you can explore this stage and more when appropriate and desired.
Why should or shouldn’t someone raise money for a business among family?
- You should because that’s what most do and you really don’t have any other sources other than yourself when you’re starting out
- You shouldn’t because they’ll lose the money. Slim chance they won’t but odds are they will.
Make sure everyone involved is involved for the right reasons and fully aware of what’s likely. Your family is there to help, that’s part of what “family” means. If they’re investing in your business to make money, do the right thing and say, “No thanks.”