Friends & Family Funding While Raising Capital for Search Phase

August 08, 2024

by a searcher from Babson College - F.W. Olin Graduate School in United States

I’m in the early stages of reaching out to investors to raise capital for my search fund. I've been advised that some investors might express interest but are fully allocated for 2024, and may ask me to wait until###-###-#### While I’d prefer not to wait, I'm exploring ways to bridge this gap.

Several family members and friends are interested in investing, but my lawyer has cautioned against accepting more than 10% of my funds from investors unfamiliar with search funds, as this could scare off traditional search fund investors.

Does anyone have suggestions for structuring agreements with friends and family to fund my search through the remainder of 2024, in a way that won’t scare off traditional investors, dilute equity, etc.?

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Reply by a searcher
from Dalhousie University in Toronto, ON, Canada

I might have a controversial take here, but you should get your money any way you can. If that means getting 30, 40, 50% of the money you need from people that you trust, even though they are not traditional searchers, then that would be fantastic in my books. Pros and cons to each of course. But one of the pros of getting it from family and friends is that they start from a basis of trust, which believe me, goes a long way. Whereas if you're getting capital from people you are meeting for the first time, you have to build that trust, and that comes with a lot of hoops to jump through. And that's not necessarily a bad thing, but that will take up a lot of your time and be very repetitive. But if you've raised a bunch of capital without having to do that, it just means you might have to do less of it because you need less from traditional search fund backers, who would also be strangers. I agree with Henry Carter, traditional searchers will follow the opportunities. I don't think who exactly makes up the cap table will be the make or break for the investors.

Reply by an investor
from University of Oxford in Austin, TX, USA

I feel like you've been given some pretty bad advice. Investors are NOT tapped out for the year. Good investors manage their liquidity properly and deploy at an appropriate pace. They don't want to miss out on a deal because of timing - and neither should you.

I've never hear of investors looking upon friends/family investment negatively. Honestly I think its a good thing that the people that know the searcher best are willing to share the risk with them. One small consideration is that friends & family might bring less experience to the table than a seasoned or in-industry investor - so you might not want to have them be 100% of the equity.

In terms of structure, you'll want to have all investors on equal terms. So whatever terms you offer to friends/family you should be prepared to offer investors too. The one exception that I see is lower investment minimums for friends/family.

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