Friends and family as investors?

April 24, 2020

by a searcher from HEC School of Management, Paris in Seattle, WA, USA

Hello all,

I'm researching the possibility of a search fund and I have a couple big questions about raising funds through family and friends. I have a pretty good network of high net worth individuals and most of them are family friends. It's pretty natural that they would be more likely than others to invest because of the pre-exisiting relationships, but there is also the most to lose if things go south. It's not just a business relationship on the line, but an entire community of family friends I've grown up with.

That being said, if I do pull in family and friends, are they truly the best people to involve as personal relationships can cloud sounds business decisions?

So my questions are:

1) How do you balance the relationship with F&F who are investors?

2) Are F&F necessary? Is it possible to acquire a company on bank debt and seller debt alone?

3) Are the only two options for funding the search phase self-funding and F&F investors?

Thank you in advance!

Reply by a searcher
from University of Pennsylvania in Chicago, IL, USA

I will offer up some ideas for consideration: I think raising capital is a primarily a marketing/sales project. And step 1 in the process is qualify the customer. Meaning, if I am in the business of selling product A, I probably want to first look at a segment that involves people who have bought product A in the past or a similar product, and have the financial capacity/desire to do it again. The problem with friends and family is that usually the qualification process isn't rigorous, it is something like "is person X rich"... if yes, pitch them, if no, don't pitch them. That isn't a very successful sales process typically. I am all for Friends and Family, but I think the best process is simply to tell them about what you plan to do and ask for referrals (don't let them think that you are asking them and don't talk about money directly). Then apply some qualification to the referrals or in many cases the above conversation will generate interest of its own. The investment "ask" should in all cases be a small % of the person's net worth (that increases likelihood of them investing in you and protects them if you fail). I say go for it though. Warren Buffet got started with friends and family, and the F&F got very rich in the process ;-)

I think F&F is very common in all entrepreneurial endeavors, especially when starting out. If someone doesn't need it, all the better - but it often is necessary to get things rolling.

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