Understanding Seed Funding from Friends and Family: A Guide for Startups

When starting a business, securing seed funding is often seen as a crucial step. This funding can come from various sources, including friends and family, angel investors, and venture capitalists (VCs). While it isn’t always required to raise money from friends and family before professional investors get involved, it is more common than not due to the limited options available to many startups. In this guide, we’ll explore the role of seed funding from friends and family and the typical amounts raised before moving on to professional investors.

Typical Amounts Raised from Friends and Family

Based on my experiences in the US, a typical high-growth startup often secures tens of thousands to hundreds of thousands of dollars in seed funding from friends and family before professional investors like angels or VCs step in. This money can come directly from the founders themselves or from their personal networks.

While raising funds from friends and family might seem like an obvious choice, it’s important to understand the dynamics and potential implications of this form of funding. These funds are typically used for early-stage development and market validation, allowing the startup to test its product or service in the real world before seeking further investment.

The Role of Friends, Family, and Angels in Startups

Many entrepreneurs believe that raising money from friends and family is a unique stage before angels or VCs step in. However, the reality is more complex. In my experience, friends and family (FFF) are often seen as one of the earliest forms of angel investment. They are not necessarily a distinct stage but rather an early form of investment that can come before or alongside angel investors.

It’s important to note that if you have not saved any money and are relying heavily on friends and family for investment, it might be best to view this as an initial stage rather than a formal investment. Formal angel investments usually require that the founder has quit their job and has a viable business plan in place.

Pros and Cons of Raising Funds from Friends and Family

Pros: Access to initial capital without the bureaucracy of formal investment structures. Reduced risk of failure, as friends and family are more likely to support the venture. Potential for long-term business relationships and mentorship opportunities.

Cons: Personal relationships may become strained if the business fails to generate sufficient returns. Limited amount of funds compared to professional investors. Loss of equity and potential control of the business if friends and family stay involved for a long time.

Creating a Financial Viability Plan

Before seeking any form of external funding, it’s crucial to create a financial viability plan for your business. This plan should outline your business’s revenue streams, expense projections, and overall financial goals. Share this plan with potential investors, whether they are friends, family, or professional investors.

As a general rule, I would recommend not raising funds from friends and family if you have not saved any money. However, if you have substantial personal savings or a business plan that will generate significant returns, then it can be a viable option. Always aim to create a strong business plan before seeking any investment.

For a sample financial viability plan format, consider the following:

Budget and expense projections Revenue models and forecasts Evaluation of market conditions and competition Plan for growth and expansion Timeline for achieving key milestones

By creating a robust financial viability plan, you will be better equipped to demonstrate your business’s potential to both friends and family, as well as to professional investors. This plan will help you to manage your resources effectively and increase your chances of success.

Conclusion

In conclusion, while raising funds from friends and family is a common and sometimes necessary practice for startups, it’s important to approach it with a clear understanding of its implications. Whether you see it as a stage before angel investments or as a direct form of angel funding, ensure that you have a solid financial viability plan in place before seeking any external funding. This will help you to secure the support you need while maintaining control and integrity over your business.