Why taking money from your family or your friends is a bad idea

In Fundraising by Sébastien FluryLeave a Comment

A lot of people have ideas to do a startup. 99% of people stay wannabe entrepreneurs and never make the step to dive into real startup’s life. It’s quite understandable, as starting up requires some sacrifices, both financially and on your free time (what is this, again?). Recurring revenues (your salary) are something you just can dream about after starting. And you basically have almost no more free time. I’m not saying you’re constantly ON, but you’re never completely OFF (the best ideas come when you’re doing something else, like having a shower!).

If you want to launch a tech startup company, you need money. Everyone telling you the contrary is a liar (or simply doesn’t know what he’s talking about)!

The first financial investment in your company is almost always coming from your own pockets, and that’s perfectly right. I’ve never met (so far?) an entrepreneur who didn’t invest some money himself or made a lot of sacrifices (which can be illustrated by the cost of opportunity – taking a really small salary to just survive). Nobody is investing in only a great Business Plan with nothing yet developed (the only known exception is if you have already built and successfully exited a few startups, which gives the impression that there’s no risk in your new project). If you know people investing like this in Switzerland, don’t hesitate to tell me!

The sources of money are – potentially – multiple. As an entrepreneur you always hear about the 3F concept (Family, Friends and Fools). Which is actually wrong… there are 6F!

  • Founders
  • Family
  • Friends
  • Fools
  • Foundations
  • Family Offices

The fools are wealthy individuals who are ready to invest in your project quite irrationally – or are they the real superstars of a startup ecosystem, because they have guts to fund a team of other fools (entrepreneurs are hungry and foolish, as Steve Jobs greatly said years ago) with an interesting project with some risks? Foolish wealthy individuals are quite hard to find, however… Maybe you can find them where startup entrepreneurs don’t spend time (golf, VIP lodges of football clubs, etc.)!

In Switzerland, there are hundreds or even thousands foundations. A considerable percentage is investing in startups (well, lending some money to entrepreneurs, who give back a personal guarantee on half the loan). The problem is that most foundations are quite generalist. And that really few are OK to invest in internet startups with no “real innovation” (well, without any patent (…) – yeah, “business model innovation and strong execution capability is hard to protect” – patents seem to give the value of innovation, in Switzerland). But there are some foundations who do a good job, fortunately. The only challenge is to find them (a lot are not that visible).

Apparently, there are also many family offices established here. But this type of investors is per default almost never public or even doesn’t have any web presence telling the world their activity. It’s quite hard to find them, as fools.

So what’s left for an early stage startup?

  • Founders: you invest your own money and your time. You sometimes hear people telling that entrepreneurs have to be “all in” and be extremely hungry to succeed (that is: eat pasta and cervelat during months, if not years). I say no. No, you’d better no be all in. And you don’t need to literally starve to be able to succeed. You have to be hungry to succeed, not having a real hunger. If you don’t know how to pay your flat rent and your bills to just live, how can you focus your mind and energy on successfully building a startup?
  • Family and Friends: there is a common advice that if your family and friends don’t invest in your company (even though they are the ones who know you best and believe in you most), that mean you won’t be able to raise any money from investors. If you even cannot convince your mother/father, who’d believe in you? Again, I say no. Because first, you need a rich family or rich friends. Or rich enough to invest in your project without putting their own life in jeopardy. How many of you have family members who can invest CHF 10’000.- and more without really caring? But even you have wealthy friends, you’d better consider twice the option of taking money from them.

Why? The odds are, your startup will probably fail. It’s not pessimism, it’s reality. And so your family and friends will lose all the money invested. Yes, sure, they know the risks, because you’ve spent a lot of time explaining them. And they’ve understood. But the feeling they will probably remember, is that you truly believed in your company. And that was true. Sincere. Otherwise, you wouldn’t have pushed so hard and taken their investment.

In my humble opinion, it’s better not to take money from family and friends. Because money is never an easy topic among family members and with friends. And if you’ve lost their money, a relentless feeling could be that you could have done a better use of the cash (yes, it’s legitimate. And it’s easy to criticize afterwards). Not only did you lose the money, but moreover your relationship with these guys (and gals) can be endangered. So, what’s the final situation: you’ve lost your money, your family&friends’ money, and you have nothing left on the table. It can be hard to ask your family or friends to help you financially again. To help you recover. To help you start again (in life)?

So better keep an option for the worst case scenario. Otherwise, the consequences can be dramatic and you’ll need years to come back to a normal situation (paying back your debts, etc.).

UPDATE: after talking with an angel yesterday, I’d like to precise that I’m not against taking money from family and friends. But their bet in you shouldn’t risk their financial situation. Following the same rules as some business angels clubs, they should have a sufficient fortune wealth and invest a part of it (not everything)! 

What’s left for entrepreneurs, then? Customers. Customers don’t ask for equities. Customers pay. Customers finance the product. One of the solution for early stage startups? Yes, probably. And the quicker you have customers, the quicker you’re building a real company. And that’s good. That’s not investors who will make your company economically sustainable.

Easy? No. Nothing in entrepreneurship is easy!

I know my opinion is a bit contrarian and I’d be happy to open the discussion! Please share this article if it was pleasant for you. And do not hesitate to comment and tell me your thoughts!