When attempting to start a new venture, the novice entrepreneur must consider one of the most important components of the start-up. How will the business be funded? While the entrepreneur can absolutely obtain bank/institutional loans (if his/her credit is satisfactory), locate an angel investor, or solicit venture capital investors amongst many other options available to them; many entrepreneurs utilize their close network of family and friends initially to amass the capital needed.
Friends and family members seem like the obvious first choice when soliciting a funder since well, they already know you intimately. It’s not like with a bank where an application for the monies is required, the individual’s credit history or credit worthiness is examined; and there’s still a chance for denial. Conversely, mom and dad or your best friend from middle school are far less likely to turn you down and, unlike the bank, will require very little hurdles (i.e. applications), since understandably they want to see you succeed in life. This was certainly the case with Jeff Bezos, the owner and operator of Amazon and currently dubbed the, “richest man in modern history.” Bezos started his company with an initial cash investment of $300k from his parents. Although he warned his parents and other financiers of the risks associated with investing, he was able to turn his organization into the largest online shopping retailer in the world and make substantial returns on their investments!
But what if things had gone dreadfully wrong and Bezos had not turned such a magnificent profit? He would then be indebted to each investor (including mom and dad) and may not ever recoup the funds to pay them all back! This brings us to the idea of why friends and family members are oftentimes not the best choices when it comes to funding the startup. While friends and family members may be delighted to facilitate the entrepreneur’s dreams, their moods will quickly change when they are not able to fully comprehend that the business is no longer in operation and you have essentially exhausted their funds, with no way in the near future to pay them back! Because these individuals know the entrepreneur intimately, it can create an irrevocable strain on the relationship that can effortlessly dissolve the bonds that took years to build.
So, is it worth it? Well, that’s for you to decide. If the entrepreneur should choose to use a friend or family member for funding their venture, they will undoubtedly need to assess the importance of the relationship and the pros and cons associated with accepting the funds. If the relationship is too valuable to be tainted, the entrepreneur should try to locate other sources. Banks, the SBA, angel investors, and a multitude of others resources exist solely to assist small business owners with bringing their ventures to fruition; and that’s without running the risk of losing your favorite Aunt May’s life savings and being uninvited from all future family dinners at her place!
The Ins and Outs of Raising Money From Friends and Family. (2013, September 09). Retrieved October 2nd, 2020, from https://www.entrepreneur.com/article/228103
Jeff Bezos. (2020, September 29). Retrieved October 02, 2020, from https://en.wikipedia.org/wiki/Jeff_Bezos