Tempting though it may be, it might not be worth the emotional price.
It is the classic entrepreneurial dilemma: You need money to get underway or maybe to expand, but traditional funding sources are closed to you. Banks will only lend on what they consider to be a sure thing—and they say your venture is not—and odds are you are too small to attract the attention of professional investors like venture capitalists.
In this sort of situation, having friends and/or family who are willing to invest in you can sure look appealing.
I understand the attraction completely.
My advice: Beware.
Nothing can bring as much embarrassment, resentment, and peril to relationships with people you love and respect than losing their money. The risk to personal relationships is almost certainly not worth the potential pain and anguish in taking them on as investors.
On top of that, there is a very little upside for you.
If the deal works—that is you make some money for the people who invest with you—you won’t get a whole lot of thanks. “The investment was supposed to work out. That’s why we gave you the money,” will probably be the response of your friends and family members (after, perhaps, a quick “thank you.”)
But if it doesn’t the investment doesn’t go as everyone hopes, things can get awkward in a hurry.
For too much of my career, I was not disciplined enough to say no to friends and family who wanted to invest in my deals. Often, I felt the urge to do them a favor, but accepting money for an investment that you are responsible for can be a huge burden if it doesn’t turn out well.
Too often, a successful entrepreneur takes the money because he wants to be a hero—not because it spells the difference between making the deal or losing it. It’s can be the classic case of no good deed ever going unpunished.
Some people try to get around this by adopting what they call “the Big Boy” rule. They say if the friend or family member is an experienced investor—i.e. a big boy or girl—they are willing to take them on as a partner since presumably, they understand the risk.
Even so, your family member or friend is going disappointed if there is a loss.
I know at the very beginning when you only have sweat equity to offer, no one other than friends and family are likely to invest.
But the problem is typically, family and friends blindly follow a successful entrepreneur or general partner into the deal without understanding the associated risks and business landscape. They assume that, given an entrepreneur’s track record, they’ll make a profit, and they are shocked if an investment goes sour. That puts the entrepreneur or partner in an unfair position, worrying about making up their losses at precisely the time he or she, as the lead investor, has probably suffered higher losses than anyone.
Err on the side of caution. As annoyed as friends and family might be at not benefitting from one of your successes, they will definitely be relieved when they learn that they missed out on your big loser.
If your family or friends give you money to invest they expect to make money. Probably a lot of money. Make sure you want that (additional) pressure, before accepting their funds. It’s extremely painful to lose the money of a family member or friend. It is also embarrassing and makes Thanksgiving get-togethers awkward.
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