Angels and Daemons

I was asked to speak for 8 minutes about angel investing recently at the Levin Institute. The audience was composed of 35 entrepreneurs who had all started a business.

***I'm paraphrasing here so I sound much better in text than I did live and improvising at the event.***

I'd like to talk about the celebrated "friends and family round." It seems almost all entrepreneurs have raised money from friends and family. How many of you in this audience have raised money from friends and family? (I think 3 raised their hands with pride)

I'm going to argue today that raising a "friends and family round" first is the wrong thing to do. Everyone does this first before they go out to raise money from strangers or the bank. I'm going to argue that this is the exact wrong order. Why?

Since we're talking about angels, let me get a little biblical on you. In the beginning....(pause) everything looks good. You've got a great idea. You're going to get fabulously rich while making millions of customers very happy. You have more enthusiasm and energy than you've ever possessed before. You believe 100% that you will succeed. This is when you are most seductive. Worse yet - your friends and family are the people most likely to believe you and be seduced by you! Except for your mother-in-law but she's another story.

But your friends and family are the last people you should be seducing. Because as history runs its course, your startup will encounter disasters of biblical proportions. There will be droughts, famines, and pestilence in the form of flaky suppliers, non-paying customers, unreliable employees, and the dreaded cash flow devil. Things will inevitably go wrong. How you solve the problems will determine how successful an entrepreneur you will become.

But when these disasters happen - investors go crazy. They start breathing down your neck and asking why you haven't made them a fortune already. You don't want these people to be your friends and your family. You want these people to be strangers.

You see, when you raise money from investors, you should treat that money as sacred. You're going to be aggressive and try to build a company of great value for sure, but you should be very careful how you spend that money. It's a balancing act that requires passion and rationality. But when that money comes from Aunt Ruth or Uncle Ralph or your buddy Frank, all sorts of emotional demons come into the picture. This emotion hampers your ability to make rational and passionate decisions. This in turn hampers your ability to be the best entrepreneur you can be. Your startup may still succeed - plenty have with friends and family money - but they probably could've grown bigger faster better without.

You should raise money from strangers. If you can't sell your vision and a part of you company to strangers, then how will you be able to convince a stranger to buy your product? One of the keys to success as an entrepreneur is how well you sell. Everything. You, your vision, your company, your product, your service. To everyone. Your customers, your suppliers, your vendors, your bank, and even your investors.

So you might as well start by selling to the most difficult people. Strangers, real angel investors who are skeptical. Not your Uncle Bob or your buddy Sam who want to believe in you.

So do it backwards. Friends and family. They should be a last resort not the first resort! Raise money from friends and family after you've tried everyone else! After you've lost that initial shine as a brand new entrepreneur. After you've faced a ton of rejections. After you've become a little less seductive. Then if you still need their money, and let's hope you won't, they'll know exactly what they're getting into. Because when the difficult times come, you're going to need your real friends and family to be there to support you and love you.

Thank you all for your time. I think what you're doing is amazing and a big inspiration to me.

(Their questions afterward were pretty good too.)

Comments

[Joseph Joel Sherman]

Great point. I think it is also important to consider why friends and family invest. A relative may be trying to help someone out, but if this comes at the risk of loosing part of their retirement fund or savings it can put an additional burden on the entrepreneur. The relative who uses a portion of their retirement may not be able to withstand its loss, compared with a bank or investment group that expects the risk.