I know this post is going to upset some people - we all want to feel we’re doing the right thing and it’s super offensive to hear that despite this being the norm, if you’re basing your initial startup’s funding on your friends and family - you’re being very unfair and selfish.
If you’ve already done it - I wish you and everyone involved the best of luck. I really do. If you haven't, I hope this will make you reconsider.
I know it seems like a valid road to go down, I know so many people around you in the startup ecosystem do it, but believe me, what you’re doing is robbing your nearest and dearest of their hard earned savings.
I hope one day you’ll think back to the day you’ve read this and thank god (or whoever) you stopped before it was too late.
Small exception - If you’re Bill Gates’s son or friend - you can disregard this post. He can afford to handle your loss and would probably see it as a better investment than to pay your college fees.
Now, here’s why I feel so strongly about this topic:
Statistics - it’s a game of numbers and the numbers are against you. And that’s a fact.
About 90% of new startups fail. Ninety percent. What a depressing stat. And please, in no means let that deter you from pursuing your dreams. I think if you are passionate about something you should do it. I believe that with all my heart. Even at the probable chance that you’ll fail - as Henry Ford famously said “failure is simply the opportunity to begin again, this time intelligently”. You can learn what went wrong, regroup and try again. BUT - your friends and family shouldn’t be the ones funding your real life tuition. I think there’s only one condition where that would be fair - when they’re aware of the chances and are entering this with their eyes wide open.
Now this is tricky, as a startup founder you have to have tunnel vision, you have to believe you’ve got a winner on your hands, You have to be the crazy one that believes in your idea when no one else does. And that passion is also your drive to raise money from whoever is willing to listen. Still, the closest people to you shouldn’t be a part of that equation, keep them there as your biggest cheerleaders, not as your financial backers. You’ll need their moral support more than ever if and when the shit hits the fan.
You’re just putting them in a spot
When you go to your friends and family and ask for money for your idea, you’re making it personal. If they say no, it’s as if they’re saying they don’t believe in you. And they’re uncomfortable. Even “worst” - they do believe in you. But what will happen in the case your startup fails? Are they prepared to lose that money? What percentage of their capital are you risking? Are they expecting to get it back? Even if it’s not an investment but a donation - how will they feel if it goes to waste? What would they otherwise have used the money for? How will you live with yourself knowing you’re preventing them of that?
They’re your friends and family so they won’t negotiate with you and won’t ask you the tough questions an unbiased angel or a VC would
Figuring out your business and validating it is a ruthless journey. You need professional people by your side whom will be brutally honest with you and question every single aspect of your business model. Raising money from unbiased people will dramatically increase the accuracy level of which you’ll enter your startup adventure.
Ideally, go for an MVP approach, create a valid proof of concept and then go to get an investment. Now you might be thinking that in order to create a POC you need money from your friends and family. NO! Go to the bank, go wait tables, get a day job and work on your project at night. Figure it out, and leave them out of it.
You’re not doing THEM a favor
You think you’re taking care of them by giving them an opportunity to get a piece of the pie. So that when you exit your startup they’d enjoy the fruit of their investment. I say - if you’re so close to each other and you want to help them so much, when you exit - give your friends and family a cut because they’ve always been there for you and supported you. They were there for you on all those tough moments when you were about to give up. They encouraged you and helped you get through and break through. Uncomfortable with that notion? Hell that’s all the more reason you shouldn’t be taking money from them.
Mixing business and family/friendships isn’t worth the risk to your relationships
In business the business needs to come first. You make decisions based on what’s best for the business, whilst with friends and family you typically put them before you. So for example, if a family member is invested in your business and you give them voting rights - they might not be qualified to make calls. In a healthy business environment you wouldn't tolerate that, but with a family member, you’ll now start feeling uncomfortable and not want to offend them. Especially if they’ve given you money. And yes, there are mechanisms to prevent such instances. And yes, you can align expectations, but at the end of the day, you’ll end up seeing sides of your friends and family that you could have spent a lifetime not seeing and a happy one at that. Sometimes interests simply collide and it’s not in the best interest of anyone involved.
I admire anyone going after their dreams and taking the unstable entrepreneurial path. I work with startups daily, I’ve founded a few companies (including this agency you’re currently visiting online) and I’ve had my share of failures. It’s incredible. My point is that we all need to take responsibility for ourselves and not drag other people into our journey. Not unless it’s 100% clear to them (and you) what happens if things don’t work out the way you hope. GOOD LUCK!