This Hot Topic is based on an FD:Discuss post by David Gold, who wanted to know the pros and cons of raising money through friends and family to get a company started. It’s definitely one way to get that initial investment to get a startup going, but there are also some drawbacks.
Here’s our list of pros and cons:
Pro: They already know you, so it’s quicker.
The people you’re asking to invest in your company know who you are already, so they don’t have to spend the few months investors usually do to get to know you before they invest.
Con: They might not understand what they’re getting into.
Startups are risky, but friends and family unfamiliar with business may not be able to grasp that. They may think this is a great way to support you but they should do it for only that reason not because they expect to make a ton of money. It’s important for them to understand that “when you bring in professional investors, the value will be more accurate and may hurt” them, according to FD member Gil Benton.
Pro: They might be your best option.
While it may be risky for friends and family to put your faith in you, it’s worthwhile to have them to invest in you if you’re really passionate about your idea. It’s a better choice than not trying at all.
Con: Investors can definitely give you business advice. Family and friends may not be able to.
While friends and family may believe in your idea, they may not be very helpful when it comes to the execution of that idea. Since investors have experience working with startups, they can provide guidance along with money.
Pro: If they can trust you, then an investor is more likely to trust you as well.
Friends and family can be good investors for a first round, when it’s hard to find someone to invest in just an idea. It helps to have that edge when raising a second round, and investors will receive you better.
Con: Thanksgiving could be awkward.
FD Member John Wallace makes the point that “it’s too hard making dispassionate business decisions regarding people that I know and love.” When friends and family are involved, every business decision holds an extra emotional weight.
Pro: They can give you the extra push that you need.
Knowing that someone you love has invested money in you, can make you go that extra mile to be successful with your startup. Plus, if you are successful your friends and family could be sharing in the upside.
Do you think friends and family are the way to go, or should entrepreneurs stick with investors? Let us know in the comments!