Joey and Felix Flores

The other day our YC homie and LAL.com CEO Evan Reas wrote a great blog post about seed stage fundraising.  If anyone knows how to raise a great seed round, it’s Evan.

I made a joking comment about how different raising money has been for a music startup that doesn’t have LikeALittle’s monstrous user ascent.  And, given our knack for sharing nearly all of our startup emotions, we might as well talk about perhaps the most emotional experience we have had in building Earbits, and that’s raising money from friends and family.

It would be pointless to compare a friends and family round to a VC round, so this is clearly describing the difference between F&F and Angel investors.

Depends on the Friends, Depends on the Family

Before I get into the Pros and Cons of raising a friends and family round, I should clarify something.  Some peoples’ experience raising money from friends and family might be different than ours.  After all, some peoples’ friends and families are very wealthy.

Ours are not.

Most of them are not risking money they can’t afford to (read: most), but of our dozen or so F&F investors, a two-toed sloth could count the millionaires.

And with that…

The Pros and Cons

Forgive and Forget

Since this is an ongoing joke of ours, I’ll get it out of the way first.  The pro of raising from an investor you don’t know is that, if it doesn’t work out, you probably won’t be seeing much of that person ever again.  Hopefully, without them around reminding you evermore of your failure, eventually you can forgive yourself for losing their money.

The con of raising from friends and family is the opposite.  You’ll not only have a harder time forgiving yourself for losing money from someone who wasn’t taking the risk for the upside and adventure alone, but you may have an awkward ongoing relationship with that person afterward, or not much of a relationship at all.

We raised from nearly every friend and family member we could get excited about our idea.  The joke is, if Earbits fails we won’t have a friend or family member left.

Under Pressure

Because in many cases the previous possibility – a life of uncomfortable silences at Thanksgiving – is very real, the pressure that comes with taking money from friends and family is immense.  Particularly if your friends and family are not wealthy people, the idea of losing their money can be almost unbearable.  The pressure of being a founder alone is enough.  The pressure of being a founder risking someone else’s money can be even harder.  The pressure of trying to be successful with money taken from people you know and care about on a more personal level simply can’t be described.  This is both a pro and a con.  You should already be on your A Game, but this kind of pressure can add to it in a good way.  That being said, founders are already under enough pressure as it is.   Adding more shouldn’t be necessary, either.

No Such Thing As a Stupid Question

A pro of raising money from people who only gave it to you because they care about and believe in you (and maaaaaybe your idea) is that they’ll rarely have questions for you.  They’re probably not going to bombard you with requests for reports or ask you why your numbers dipped from last month.  That being said, one of the pros of working with strong investors who invest in many companies is that they sometimes ask some very important questions, questions that make you think about your business in new ways.

The other side to the question coin is that you might not be able to ask friends and family a whole lot of important business questions either.  If you’re lucky enough that your family or friends have extensive experience, more power to you, but since you probably haven’t picked them for their business experience specifically (like you may have with other investors), you might be on your own.  The right investors will have a lot of experience in your industry, or at least in operating or founding an early stage company.  Having them around can prove very valuable when you yourself have questions.

Hotter or Colder

One awesome pro I have experienced in taking money from friends and family is a “we’re in this together” vibe that has brought me closer with them.  That’s probably because we didn’t take money from anybody with the slightest hint of reluctance.  And so, the jokes about not losing their money, the mutual skin in the game, it’s all been a nice and welcome addition to my relationship with my friends and family investors.  We get that pro with our Angel investors, too, but we rarely sit across from them in a game of Monopoly like we do with our friends (although I challenge any of our investors to Monopoly – anytime!).

The con, which I can only imagine since it hasn’t happened to me, is that I can see the wrong friend or family making bad jokes, or becoming uncomfortable engaging with you like they used to, now that you have their money at risk.  Or, holding it over your head.  That has never and will never happen with the awesome people we have involved in Earbits, but I could see that being a con whether your investors are F&F or not, but more so when you have to see them at every family gathering or BBQ.

There’s More Where That Came From

This might only pertain to F&F investors who aren’t that wealthy to begin with, but it may also apply to those who say, “I’ll give you X, but then you’re on your own.”  The simple fact is, there might not be more where that came from with family.  The same can, of course, be true of any investor.  But the simple fact is that regular Angel investors are definitely in it for the returns and there are no returns if you run out of money.  As long as it looks like there’s light at the end of the tunnel, your regular investors would be wise to double down and give you a little more runway.  Your family investors are less likely to be able to assess your business’ real potential and may just have to decide to cut their losses and feel like they did their part.  You may get a more objective response from a seasoned and risk-tolerant investor.

It’s All In the Family

I don’t know if everyone feels this way or if it’s just an Earbits thing, but our investors are all family.  Every signed investment paperwork is returned with the same words, “Welcome to the family.”  We take very seriously the act of taking anybody’s money.

While I think we’re in as good a position as anyone to talk about the pros and cons that have gone through our heads as we’ve received investments from generous friends and family, the stone cold truth is that we haven’t experienced any of the cons above except maybe the extra pressure.

And so the final point is this:

There are pros and cons to taking money, and there are all types of people.  It doesn’t matter where your investors come from, you need to choose them wisely.  If you pick the right ones, whether they were friends or strangers, it can be a great experience and create a long friendship as well.  If you pick the wrong ones, no lack of prior relationship can save you.  I may say we’ve gotten lucky, but in fact we’ve just been picky.

I highly recommend that everyone else be the same.

Joey Flores
CEO, earbits.com
[email protected]
Listen at www.earbits.com
Connect with us on Facebook: www.facebook.com/earbits
Listen on iPhone: itunes.apple.com/us/app/earbits-radio/id397894402
Twitter: @earbits

Share and Enjoy:
  • Facebook
  • Twitter
  • Google Bookmarks
  • Digg
  • Ping.fm
  • LinkedIn
  • Reddit
  • Slashdot
  • StumbleUpon
  • Technorati