What is a friends and family round?
This term refers to an investment round where friends and family of the founder put money into the business.
A friends and family round is often the first investment round and occurs at the early-preseed stage.
Why do founders do friends and family rounds?
At the beginning of a business launch, raising capital from friends and family is an easy way to secure investment.
The personal relationships and trust of friends and family make it easier for the founder to ask for investment in them and their idea.
Raising capital from friends and family is much faster than asking for investment from an angel investor. Founders typically close rounds from friends and family in a couple of months.
Friends and family rounds are an easy way to get hold of capital at the very early stage of a startup. If you don’t yet have much traction and your project is only an idea, it’s hard to procure investment from angel investors.
How much do founders typically raise from a friends and family round?
Investment amounts are low at this stage – typically between $10,000 and $100,000. Companies that ask for friends and family investment are usually valued under $1 million.
What’s the difference between raising capital from friends and family vs. angel investors?
With angel investment, founders need to find, reach out to and pitch several investors before finding someone willing to invest. The chance of receiving capital from an angel investor is only 10-20%.
It also takes much longer to receive money from an angel than from friends and family. The due diligence and legal processes required by angel investors can take several months.
Angel investors only tend to invest once in a business, whereas friends and family can offer multiple rounds as they know the founder.
What are the disadvantages of friends and family rounds?
When you ask for investment from your friends and family, you may put your personal relationships at risk.
What if one of your friends makes a significant investment and your business fails? Do they know the level of risk? Ensure you set up proper contracts with your investors, even when they’re friends and family.
It may be easier to get investment from friends and family at the beginning, but they often lack the experience that other investors have. They may have no idea about investing in business and the risk versus reward.
When you receive funds from an angel investor, or later down the line, a VC, they can give you access to knowledge and connections. Friends and family may not have the connections in your industry that professional investors can provide.
Tips for conducting a friends and family round
Have a solid business plan
You may know your friends and family, but you still need to approach your pitch to them with some solid data. Have you got a concrete business plan? What numbers do you have to back up your venture?
What’s the realistic valuation of your business? It’s hard to know at this early stage in the business, but your investors need some figures on how much they can expect to receive in return.
Be clear about the type of investment
Friends and family may gift you some money to invest in your startup. They may loan it to you, expecting you to pay it back (maybe with interest). They may want equity in exchange for the investment. Be clear about your investment type and what they will get from it.
Be realistic about how much investment you need
Create a plan for the next few months to determine how much you’ll need to boost your growth. If you ask for too much too soon, you may give away more equity than you want.
If you take a loan from friends and family, what are the terms for paying it back? It could be a risk as the repayments may affect your cash flow early on in your business.
Find the right people
Don’t ask everyone you know who has some spare cash to invest. Be strategic about who you ask. People with knowledge in business who can understand your goals are the best people to ask. If they can provide some input on your business, that’s a bonus!
Create terms sheets
Make the investment formal. Creating clear, legal documents for the investment will protect you, and the investor should anything go wrong.
Keep them informed
Your investors should stay informed about what’s happening, even if they’re friends and family.