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Friends and Family Funding and Why I'm Dreading Thanksgiving

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Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#11

Post by 7Figures2Commas »

wdewind wrote: post #9
7Figures2Commas wrote: post #7

> I’m deep into my second pivot, and haven’t yet delivered an exit two years after that initial money. Haven't delivered an exit after two years?!? What's wrong with you?!? Sarcasm aside, while taking money from friends and family may not always be desirable for a variety of good reasons, the problems that arise from it are usually the result of unrealistic expectations. Most companies never achieve an "exit", the av…

I don't think he means exit in the sense of IPO or sale to PE. I think he means exit for his initial f&f investors. It's not entirely unreasonable to expect a larger seed round or even a series A after 2 years.

A professional investor (or group of investors) providing a seed or Series A after a couple of years is realistically going to have little interest in cashing out existing friends and family investors at a gain. At that stage, you're investing to grow a nascent business, not to buy the founder's mom and dad a deluxe new kitchen.

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#12

Post by Domenic_S »

wdewind wrote: post #9
7Figures2Commas wrote: post #7

> I’m deep into my second pivot, and haven’t yet delivered an exit two years after that initial money. Haven't delivered an exit after two years?!? What's wrong with you?!? Sarcasm aside, while taking money from friends and family may not always be desirable for a variety of good reasons, the problems that arise from it are usually the result of unrealistic expectations. Most companies never achieve an "exit", the av…

I don't think he means exit in the sense of IPO or sale to PE. I think he means exit for his initial f&f investors. It's not entirely unreasonable to expect a larger seed round or even a series A after 2 years.

I've always heard it as f,f&f -- friends, family, and fools.

;)

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#15

Post by ereckers »

albedo wrote: post #8

This is part of what we were trying to avoid while starting Lambda ( http://getlambda.com ). Do contract work to bootstrap your company, especially for technical founders. It's very much worth it to take 1-3 months off to freelance, make ~$20-50k, and keep your entire company.

I'd say making $20-50k for 1-3 months of freelancing may be just enough to make me want to ditch the startup altogether.

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#17

Post by 001sky »

fiatmoney wrote: post #5
rayiner wrote: post #2

Relevant: http://thinkprogress.org/election/2012/04/27/473096/romney-b... . Although it is a weird dichotomy if you think about it. People let parents pay for their college to the tune of $100k+ and don't feel any obligation to justify or defend the investment.

"College" is in this case a proxy for "entrance to the socially-defined middle class". Parents in general (or at least the middle-class ones that would have money to lend/give for college) want their children to be at least as high in the social hierarchy as they are. Financing someone's business is much more of a mercenary decision; "do you run your own business" isn't really a social class marker in the way "did yo…

The purpose of borrowing from your parents is different, though. The transfer of wealth from parent to sybling via "paying for" college is (as you rightly point out) not really a loan, but a type of "grant". More specifically, its one that is both socially acceptable and tax beneficial[1].

The logic of Romney's positin on borrowing is that it is . That is to say, the parent has more information on the borrower than a bank, and therefore is in a better position to measure risk and avoid the typical market failures that correlate with the type of non-stochastic uncertainty that cling to first-time founders with no track record[2]. Your parents have much lower information gathering costs and monitoring costs than a bank, in other words. Also, since the return on the investment can be higher than what that money would otherwise get in a normal debt investment, the idea would be a win/win also in theory for the parents. This is, even with a true debt structure (ie, repayment with interest) which is again different from the way many parents 'pay' for college.

[1] Gifts over 10k are taxable.

[2] This is not technology risk, which is a different ball of wax. This is the risk that would keep a bank lending you money for a low-tech business, like a lemonade stand.

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#19

Post by 001sky »

7Figures2Commas wrote: post #11
wdewind wrote: post #9

Earlier quoted context omitted.

I don't think he means exit in the sense of IPO or sale to PE. I think he means exit for his initial f&f investors. It's not entirely unreasonable to expect a larger seed round or even a series A after 2 years.

A professional investor (or group of investors) providing a seed or Series A after a couple of years is realistically going to have little interest in cashing out existing friends and family investors at a gain. At that stage, you're investing to grow a nascent business, not to buy the founder's mom and dad a deluxe new kitchen.

Yes, this is right. An angel or early investor should not be any capital return until a proper exit. Especially if that "return" is coming from incremental capital being raised by the startup. Later in the game, when the business is de-risked and there is more demand for the company than shares to be sold, things may be different. This is why you see late-stage mezzainine investments that might take out early investors before an IPO. That is merely because those guys are momentum players, and the original investors' work in taking the actual risk of the business has been already done.

Re: Friends and Family Funding and Why I'm Dreading Thanksgiving

#20

Post by socialist_coder »

segmondy wrote: post #4

Well, next time, don't raise money from Friends and Family. Raise it yourself. Work for a few years, gain experience, live frugally and save. Then bootstrap with your own money, starting with your own money will really have you think harder than with other people's money.

I've always suggested this as well. But the truth is, almost everyone is too lazy and doesn't have enough financial discipline to do this.

FWIW I've been bootstrapping my startup for the past year and we're finally making a profit.

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