The “Founding with Friends, Founding with Strangers?” post suggested that starting a company with friends can introduced big risks, an assertion that was echoed and amplified by many of the comments, experiences, and insights that people posted in response. Among the risks: losing a great friendship when the friend underperforms, or making suboptimal business decisions because of emotional complications (hence, losing the company).
Is the same thing true with your investors?
Whether you’re trying to avoid raising venture capital or just waiting until your venture gets big enough for it, one of the most common early sources of funding is good old “friends and family.” As the people most closely connected to you, friends and family members can be accessed much more easily than strangers. However, are there risks introduced by taking their money?
Given the recent holiday, let’s consider a couple of “Thanksgiving Dinner scenarios“:
- Your favorite Uncle Fred tapped his retirement fund to give you seed money to start your company. Then your company went out of business. Are you prepared to go to your family’s Thanksgiving Dinner and face him and his wrath? (In possibly a related vein, Paul Graham says that, “The reason I didn’t take money from my parents was that I didn’t want them to lose it.”)
- Or, taking the investor side of the scenario, as you’re starting to eat your turkey and cranberry sauce, your dear nephew Johnny outlines his grand plans to quit his job and start a company, and really wants you to provide some of the funding. You’ve always liked Johnny and enjoyed giving him small cash gifts to buy himself a birthday present each year, but a $25,000 Seed Round would be quite a different gift altogether. However, you don’t have the heart to turn him down. (Oh well, you didn’t need the $25,000 anyway….)
Risking the loss of a close relationship. Emotional entanglements leading to bad business decisions. Seems like déjà vu.
Do the problems of “founding with friends and family” also apply to “funding from friends and family“? Does this source of funding introduce other problems? How have you managed those problems?