In the beginning stages of a startup, you need capital to begin building your business. Funds are essential to building products, developing ideas, building prototypes, managing web development, and building a team. Many startups, in fact, over 1/3 of startups, get their funding from friends and family. Other founders choose to go a more traditional funding route and opt to look for funding from angel investors.
Both ways of raising funds have their advantages and disadvantages, and when you're just beginning to turn your ideas into a real company, it can be hard to know where to start. We'll guide you through the ins and outs of both types of funding rounds, including the key differences and the pros and cons of each. It's important to know every aspect to ensure you are taking the right funding path for your startup and whether you should get your funding from friends and family, or angel investors.
One of the earliest forms of fundraising founders will
typically gravitate towards is the friends and family round to
earn the funds to get their startup off the ground. The
friends and family round is a sort of crowdfunding-like
project where you reach out to the people closest to you,
pitch your idea, and ask them to invest in helping you launch
your new business venture.
Much of this investment from friends and family isn't given much thought. It is often interest-free, with many members of the family or friends who choose to invest deciding they don't expect a complete payback. After all, many startups fail before they're able to fully launch.
Although the investment process from friends and family is relatively informal, you should have some kind of business plan and approach when pitching the idea. You may also want to draft a sort of contract to promise a payback to the people who invest in your startup with either repayment with interest once you start earning or equity in your company.
Working with friends and family can be a comfortable and easy way to begin your startup. It's important to understand the pros and cons before you move forward with your initial round of funding.
Easy to Pitch – You get the opportunity to pitch your idea to people you are most likely the most comfortable with. It can take a lot of pressure and be a great practice round before you get in front of big-time investors as you get further into your development.
Strong Support System Your friends and family have more invested than just capital. They are emotionally invested in your success and will be cheering you on and providing you support as you build your company.
Potential for Conflict – Receiving money from friends and family always has the potential to put a strain on relationships, even with a contract involved. If things aren't moving along as quickly and they aren't able to receive their money back as fast as they'd hoped, it can damage the relationships with the people closest to you.
Critical of Decisions – While your friends and family can be a great source of support, they can also be your harshest critics. They will be honest with you when they think you are making a mistake and may criticize the way you decide to run your startup.
Lack of Industry Knowledge – There may be a few people in your friends and family group who understand how to run a startup or are familiar with your startup's industry. Their knowledge is usually limited and isn't beneficial, but they have the potential to learn if they are interested.
Angel investors are traditionally an individual with a high
net worth known for providing financial support to new
startups and small businesses. They invest in startups early
on in development after hearing a compelling pitch and in
exchange for equity in the company. Many angel investors
invest their own money earned from former startups and are
often former entrepreneurs, corporate leaders, or business
Angel investors can be an ideal starting point for many founders because of their backgrounds, knowledge, and deep pockets. They can provide a large amount of money for the first round of investing. They have a large network of people and other angel investors that can help you grow in the long term.
Pros and Cons of Angel Investing
Choosing to go with angel investing has its pros and cons in funding your startup. Before you make your decision, here are the pros and cons of opting to go with angel investing rounds.
Potential for Future Funding – Angel investors can choose to continue to fund your startup in later rounds if they find it is financially beneficial for them. The equity in your startup is enough motivation for them to invest in your success.
Networking – Many angel investors are connected to other professionals that can potentially lead to business partnerships and become future investors. Not only that, they can become future customers or get you in touch with people interested in learning more about your business.
Mentorship – Angel investors are industry professionals, and many are former founders who have been through the startup stages. They have an immense wealth of industry knowledge and can help you make smart decisions and provide feedback to help your startup grow.
Low Upfront Costs – Working with an angel investor doesn't require you to make monthly payments. Angel investors will choose startups based on if they believe they have a chance to be successful in exchange for a percentage of equity in your startup.
Less Conflict – Working with angel investors instead of friends and family is less likely to cause any personal issues or conflict over money.
Expect to Rapidly Grow – While angel investors invest for years, they want to see progress and for your startup to hit milestones relatively quickly before the next funding rounds. The pressure can be stressful and cause you to make decisions that may not be in your startup's best interest.
Shared Control – While not always, some angel investors like to be hands-on with their investments. They want to provide their input and may require you to take the company in a direction you aren't comfortable with.
Limited Support – Angel investors can be a great resource, but many of them are busy and often are invested in more than one startup at a time. They may be unavailable when you need them the most.
Angel investors and the friends and family round are the go-to
initial funding rounds that founders will choose as they work
to build their startups. There are a lot of differences
between the two, with the only key similarity being they are
usually first-round investment opportunities.
The background of friends and family investments is when you approach the people closest to you and present an idea. These people don't have a lot of industry knowledge and will usually choose to invest because they believe in you and want to support you as a person.
Friends and family round don't usually provide your startup with a lot of funds. It can be great to get a lot of the small action items out of the way before the next round of funding as you work on it on your own. You'll likely need the next funding round much sooner than you'd anticipate.
The friends and family route is a much faster solution to fund your startup with its immediate needs like building a prototype or developing a webpage. This round has a lot less overhead, and it's less complex to start. There are no fees, usually no interests up front, and there are no complex documents.
On the other hand, angel investors are industry professionals well versed in business acumen, they're accredited, and can provide valuable insight that can help your startup grow. Angel investors can also provide a larger sum of money that will be helpful in many areas of the development of your startup.
Angel investors will usually invest in the long term until your business begins to turn a profit or is sold or acquired. These investors will provide more financing, but this round can be more costly due to the business's fees, legal paperwork, and equity costs.
There are many different funding rounds that your startup will need to go through. As you manage each round, there are going to be different ways you can achieve funding. When you're just starting, the angel investing round or the friends and family investing round is a great way to get your startup going where you need it. When you're ready to start on your journey to find the perfect investor, it can be overwhelming. Get the help you deserve to get your startup off the ground. Investor Hunt can match you with over 90,000 angel investors and venture capitalists in one place. Learn more about how Investor Hunt works here.
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