Categories of Investors for Startups: Friends and Family
The friends and family category of investors are one of the main financing options in the early financing phases. Their typical investment ranges from $10,000 to $150,000, and they focus primarily on funding in the early stages.
- During the early stages, it can be difficult to persuade traditional investors to take part in an initial funding round. Therefore, startups that search for funding during the earliest phases sometimes turn to their existing relationships, which is referred to as the "friends and family round."
- Typically, founders of startups obtain early financing from their own savings, family, and a close network of friends or personal contacts.
- Family members and friends are listed second amongst the leading startup funding sources, as reported by Quick Sprout.
- Up to 38% of the founders of startups admitted to accumulating funds from family members and friends.
Typical Investment Size & Roles
- Usually, they are individual investors and invest $10,000-$150,000 of their finances in the startup, as they have faith in the startup concept. These individuals have loyalty and close affinity towards the founder and are invested in their success.`
- According to Fundable, a crowdfunding site, the average individual investment for this category is $23,000.
- The estimated valuation of the startup involving this group is typically $0.5-$1 million.
Typical Investment Stage
- Friends and family serve as one of the primary sourcing options for startups in the early financing stage, or the pre-seed funding stage.
- The investment enables a startup to function during the initial period of operations (a few months). This particular round is oftentimes referred to as a pre-seed or a bridge round. However, the result largely includes recruiting the first workers, acquiring office space, and buying additional major resources that are necessary to become operational.
Role of Friends and Family
- Friends and family help with investments as a show of support and loyalty to the founders in the early-stage financing. Hence, they mostly provide funding.
- The friends and family category of investors often have an unending, long-term financing opportunity based on preexisting relationships.
- These investors finance startups either through loans or by equity financing. The equity allows them to obtain a share of both ownership and the profits either through business partnership or as shareholders.
- A convertible note permits the friends and family investors to buy shares in a business, "typically at a discount, at a rate that is determined later on, during the seed or Series A round." They could become shareholders at a later stage of investment.