Sharing tips on how to launch, validate and grow startups
It cannot be easy to raise money from your family and friends. But it could be your only option.
You have an idea. You’ve tested it and are sure that it can be realized. It would help if you started building it to try it. This requires at least some capital investment to your startup project.
The founder’s fund most new businesses. This could be from their savings or through business loans. Bank loans can be an excellent source of finance for traditional companies with predictable cash flow.
Credit is not the best way to finance your startup. You will need to repay the credit, regardless of whether your idea succeeds or fails. This is, unfortunately, more common due to the high failure rate for startups (over 90%).
So, most startups are started by founders who can bootstrap them in the early stages. However, if you don’t have enough money to pay for the cost of your first product, you will have to fundraise.
But, raising capital among venture capital funds and angel investors at this stage of the business is not an option. Today’s professional startup investors know better and are more cautious about investing in idea-stage startups. Investors are looking for solid evidence that the company is on a path to product-market compatibility. Investors are looking for proof that the company is on the right way to product-market fit before risk their capital. However, you must have money to develop your first product version to gain traction, which can be a trap.
If you don’t have the money to finance your startup, and banks and investors are not an option for you, your only hope is family or friends. It’s a win-win situation to be surrounded by people who will support your business venture. However, it is not an easy decision to put your hard-earned money at risk.
The FFF round, which is shorthand for friends, family, and fools, is the first pre-seed investment round. Fools are because you won’t understand the risk involved in investing in such an early-stage project. This investment might have a negative return on average.
It doesn’t mean that your friends or family are fools. These people have already invested in your life and the success of your venture. This makes such investments more valuable for them than they would for outside investors. If the expected return on the investment is negative, it could still be justified by the founders’ parents. The experience gained from building a startup from scratch will benefit the founder’s professional future, even if it fails.
The upside is more significant because parents care more about their child’s ability and willingness to work for what they love than their return. If the startup idea fails to scale or transforms into an income stream, such as a lifestyle-oriented business, angel investors or venture capital funds would consider it a failed investment. Parents might be willing to help their child start their small businesses even if the return isn’t 10x.
This is the ideal scenario. If your family and friends don’t fully grasp the implications of investing in you, you could lose your relationships. This is a horrible situation. Not only is it difficult for founders, but the emotional impact on relationships could be much more significant.
You must make sure they aren’t also fools. They should be able to clearly understand the risks and the potential loss of the investment.