The Flipside: Friends and Family Financing, Great Move or Impending Disaster?

The Flipside, Another Way to Look at an Issue

Many entrepreneurs look to family and friends as the source of their initial financing. After all, the amount of money they need is not substantial in the greater scheme of things, they already know who you are, family members want to show they support your efforts, and you don’t have to get into sticky issues like Valuation, Use of Funds, and Exit Strategy. So, sounds pretty good eh?

NOT SO FAST, you may think of it as the easiest way to get funding, but the downsides are something you should consider a lot. There is an interesting article in the Small Business Section of the Wall Street Journal today that describes the downside of using friends and family members. If you take money from friends, you have to consider the possibility that your friendship will end or be severely affected. Or how about dreading those all too often family social events where you will run into Uncle Andy who either looks at you in a way that makes you feel like a complete failure or spends the entire evening espousing his way to better run your business.

What the article did not discuss is the idea of Smart Money versus Just Money. Rarely, do family have the backgrounds to provide the mentorship that early stage companies need. Consider first time entrepreneurs, they start with an idea they have passion for and a desire to make it happen. However, they lack experience in developing a startup, understanding of the various organizational structures so they can choose the one that fits them best, identifying and selecting the right team members, access to additional levels of funding that may be require, or the Rolodex of other people they can call to help as needed. In other words, all the areas they need to successfully execute on their plan!

If you are starting out, my suggestion for one of the first things an entrepreneur should do is to find a great mentor who is willing to work with you. A mentor is someone with considerable skills, knowledge and experience to help you through a myriad of issues including being able to identify who else you should talk with.

Anybody else have an opinion?

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1 Response to “The Flipside: Friends and Family Financing, Great Move or Impending Disaster?”


  1. 1 Andrew Durham June 30, 2011 at 6:33 am

    Hi,

    Yes, having received money from friends and family for various projects over the years, I was left wishing more for help in shaping the business than for more money. Money flows to things that are well set-up and working. It flows OUT of things that are haphazard.

    And, I just came across an impressively structured crowdfunding site that helps people both get their acts together and offer their friends and family a way to financially support one’s business: http://profounder.com.

    It seems serious and I really liked what I read. Frankly, I’m for anything that helps people out of the callous clutches of the system and back into the bosom of their tribes. I actually got a lump in my throat from reading profounder’s site. I hope you like it.

    http://andrewdurham.com
    investigative designer


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