The Ups and Downs of Friends & Family Rounds

One piece of common startup / bootstrap advice is to get money from friends & family when starting a company.  And also to invest in your friends when they start companies.  I see this going around the Twittersphere and beyond.

I did this with my latest company and I want to share a word of caution. 

First of all, didn’t actually raise money from friends & family, I raised money from friends who also happened to be wealth investors that were aware of the risks inherent in startup investing.  So theoretically if it all goes wrong, it’s all good, we gave it our best shot.

But even then, the reality is it adds tremendous stress to the startup experience. You don’t want to fail not only because failing sucks, but because you REALLY don’t want to lose your friends’ money.  On one hand this can provide extra motivation, on the other hand it can cause sleepless nights and really tack on stress to an already high stress situation.

Another way I’ve seen this done better by my friend Jes in his latest venture is to wait to raise money from friends & family until the company has been largely derisked.  Meaning he invited people into his B-round, with the expectation of an exit in the near future.  In retrospect I with I had gone this route.

BUT you do often need some early money to get things off the ground.  So what to do? 

1) First thing is I would try to build free. As a side hustle and get some traction before jumping all in.  The tools are all available these days to do MVP’s free / cheap with no code, ai, etc.

2) Then once there’s some validation, I’d try to target maybe 1 or 2 friendly angels and make sure they really understand the risks and are cool with it.  Underpromise.  I would also recommend finding one that’s good with a bootstrapped model / dividends. But avoid getting small amounts from 20 friends.  It’s just as stressful the thought of losing $5k from someone as it is losing $50k or $500k.