Most have heard the saying ” keep your friends close but your enemies closer.” When it comes to business, an entrepreneur should consider following those guidelines. Founders rely on investors to assist financially when starting or growing a business. These finances are derived from three types of investors: family and friends, angel investors, and venture capitalists. By no means is an angel investor or venture capitalist an enemy, but due to a lack of trust or personal relationship, the entrepreneur tends to initially ask family and friends for financial capital. Investments from loved ones are very common, although businessmen should take precaution in relying solely on those funds.
Family and friends are critical when running a business and, “investments from friends and family are often what make a startup possible in the first place” (Wasserman 257). Those individuals also provide support, encouragement, and constructive criticism for the entrepreneur. The ability to bounce ideas off others and gain confidence in presenting a business plan is invaluable. “A founder is greatly influenced by the family and culture in which he or she grew up in. The most powerful influences may come from the early messages sent by the words and action of older relatives or by the culture in which a person grew up” (Wasserman 30). The founder will ultimately have the final decision though loved ones take part in a powerful influence.
Regardless of the business stage, startup or growth, the entrepreneur should be prudent in choosing an investor(s). According to David Amis and Howard Stevenson in the book, The 7 Fundamentals of Early Stage Investing, an investor can participate in one or more of the five fundamental roles: Silent investor, reserve force, team member, coach, controlling investor, or lead investor. Other considerations when selecting an investor should include:
1. Investor’s goals and passions
2. Market knowledge/expertise
3. Social capital in a specific industry
4. Successful experience and reputation
5. Financial capacity
It is not out of the realm of possibility to have a friend or family member(s) invest in the entrepreneur’s business and attain a high level of success. The founder either provided a professional structure for the member to abide by or the friend/family member encompassed several or all of the characteristics listed above.
Investments from family and friends are difficult to handle when the member values the small amount of wealth donated, does not provide any business skills or industry knowledge, and struggles with a professional relationship. “A boss-subordinate (entrepreneur-investor) relationship may make perfect organizational sense but will not suit a pair of best friends very well; nor will positions of equal authority suit a father and son” (Wasserman 102). The success of the business sits on the shoulders of the entrepreneur and all decision-making is his/her responsibility. Stressful business situations and differences in opinion can significantly increase tension in a personal relationship. Retaining a friend or family member as an investor eliminates a non-business environment, which can cause impacting relationship damage.
In conclusion, family and friends will always be a valuable part of an entrepreneur’s business. Personal investments can be beneficial, especially in startup, but it is imperative to define boundaries and limit activity in order to preserve personal relationships. Entrepreneurs should keep friends close for support and encouragement while working closely with quality investors to further advance the business.
Amis, David and Stevenson, Howard. Winning Angels: The 7 Fundamentals of Early Stage Investing. London; Financial Times Prentice Hall. 2001.
Wasserman, Noam. The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton, NJ: Princeton University Press, 2012.