Yo mama, can you spare a dime?

This is the second in the series of posts on early stage investments for technology startups. You can read the first one here.

In the last post I told you to avoid raising money wherever possible. Of course, it isn’t always possible and nor is it always the right approach.

There are a multitude of funding options available today, including friends and family, angels (high net worth individuals), angel networks, crowdfunding websites and of course venture capitalists.

Raising money from friends and family is usually a necessary first step so this post focuses on that. Future posts will look at the other options.

Friends and family are usually the earliest investors in startups, investing typically between $25,000 and $250,000 (Carney, 2013).

Raising money from friends and family is both easier and yet more difficult to do. You are absolutely certain your idea is going to succeed, even though you are probably aware that 90% of startups fail. Clearly, you are in the 10% otherwise why are you doing it!

So why is it both easier and yet more difficult?

1. You can raise money on just an idea ? With the closer relationship (and hopefully understanding of your capability!), it is easier to raise money right at the very beginning of your journey than almost any other (with the possible exception of crowdfunding - more on that in another post).
2. Lower expectations? Friends and family can have lower expectations of a “quick” return than other investors due to your prior relationship. This means that companies funded this way are often able to take the slow and steady approach to growth rather than the accelerated approach required by angels and venture capitalists. Whichever route, fast or slow, you decide to take, it is a good idea to be upfront about this with all your investors!
3. Tax Breaks! In the UK, the first £150,000 can be raised under the Seed Enterprise Investment scheme (SEIS). This allows your earliest investors to: 1. Receive income tax relief of 45% on investments. 2. After a three year investment period, you can get 50% capital gains tax (CGT) relief on gains, as long as you reinvest the gain in another SEIS investment in the same year. 3. Of course, most startups do fail - and you are risking your friend’s and family’s money. To soften the blow, the government allows them to offset the loss at their highest income tax rate multiplied by the amount invested minus the income tax relief already obtained.
4. You are the tortoise not the hare. Regardless of whether you are building a fast growth startup or a slow and steady one, the majority of investors at this stage do not sell their shares for at least 5 years. So be sure to be clear with your friends and family as to the situation and definitely don’t take money from someone who cannot afford to do so.
5. Beware the relationship. This is not your money. It is coming from someone you likely know very well and will see often. There is a thing about relationships, they are not static and unchanging and are usually filled with sugar and spice ;) Be sure to weigh up the risks!
6. Indicators and strength. Raising from friends and family, whilst not 100% necessary to achieve funding from angels or venture capitalists, do act as an indicator to external investors that others believe in your idea but more importantly can delay your need to go to these external investors. Assuming you are a growing successfully, the later you approach these investors the stronger your position is.

Finally, today, with the advent of crowdfunding platforms like Seedrs and Syndicate Room, it is often easier to combine your friends and family investors with a crowdfunding platform. More in the next post.