The perks and pitfalls of friends and family funding, from three founders who have been there

Behind every great startup founder there’s famously an army of supporters, champions and believers; the social circle that’s always there to celebrate wins and commiserate over a beer.

But what about when friends and family do more than cheering from the sidelines? What about when they’re invested financially as well as emotionally?

This is the case for many early-stage startups trying to get off the ground, and if it’s not done well, it can lead to confusion and confrontation at best, and heartbreak and hardship at worst.

We’ve spoken to three founders who have reached out to their closest mates, immediate family, and life-long contacts about how they approached them for funding, the challenges and emotional near-misses along the way.

“A case of necessity”

Wendy Oxenham is founder and chief executive of Divvito, a communication tool and AI assistant for separated parents.

She tells StartupSmart she had the idea for the startup in 2015, when she was separated and co-parenting herself, but it wasn’t until 2017 that she took the leap and started working on it full time.

“When you’re talking about something for two years, and trying to understand that first iteration, you’re talking to your family constantly,” she says.

“They very much understood from a first-hand perspective how and why I was so keen to solve this problem.”

Oxenham attended a woman-focused pitching workshop, but before she could get in front of a VC investor, a family member approached here and asked to invest.

“I realised I hadn’t even thought of asking family,” she says.

Similarly, founder of fintech startup Frollo Gareth Gumbley tell StartupSmart he initially bootstrapped, using his own savings to get set up. In September last year, Frollo secured $65,000 in grant funding, but before that, it was financed by friends and family.

Gumbley says when he went down the friends and family route “it was a case of necessity”.

The startup had opportunities coming in that required more funds that Gumbley had, and the founder “wanted to raise funds without losing momentum”.

Again, he had already been sharing his progress with his family and social circles.

“People bought into it,” he says.

For Gumbley, it helped that he had a track record. The people closest to him had seen him “executing on what I set out to do”, he says, in a way other investors had not.

“That gave them the confidence to invest at a very early and risky stage of a startup,” he adds.

For one entrepreneur, it was his passion and the very nature of his business that got investors excited.

Helicopter pilot Royce Crown launched Monarc Global with co-founder Monica Zagrodney in 2017, and has raised $75,000, primarily from friends.

“Be passionate about your idea and just talk about it. If your friends and family are interested they will let you know,” Crown tells StartupSmart.

Again, Crown says he’s a hard worker who’s not deterred from a challenge — and his friends know this.

Investment or no investment, “I’m going to do this either way, the difference is the length of time it would take me”, he says.

“My passion has made them want to get involved,” he adds.

Three of Monarc Global’s investors are buddies Crown met at the dog park, he explains. But, there’s a certain appeal to this particular startup that has piqued these dogwalkers’ interest.

Monarc Global provides booking technology for private aircraft travel, with varying pricing depending on demand, as it does with commercial travel.

He’s dealing in “something people find to be unattainable”, he says.

“The more I talked about, the more they were like, ‘wow’.”

Gareth Gumbley (centre) with the Frollo team. Source: Supplied.

“You can’t go back and fix it”

Gumbley explains founders must consider who exactly they’re taking investment from and whether they can afford to lose it.

“It’s really important they’re in a position they can make that investment without having detriment on their life,” he says.

Any startup investment is risky, and founders should take the time to properly explain those risks.

“I was clear if this didn’t work out they were going to lose their money,” Gumbley says.

He was also clear about what the funding would be used for, and “kept myself accountable on that”.

And, once money has changed hands, founders should remain transparent, sharing news as they go, as they would with any other investor.

“You have to take it seriously,” he says.

Oxenham also says she sat down with any family member that wanted to invest to explain how it would work, what their expectations should be, and the roadmaps and reports they would receive.

“Everything was put in place to be sure we did it right from the start,” she says.

“You can’t go back and fix it.”

She was also sure to draw “clear lines about what the investment and the relationship look like”.

If they wanted to talk about the investment, that was a business conversation. But for the most part, family is family, she says.

That said, investors are “very much a part of the journey”.

Oxenham provides monthly video updates, and she knows her investors are willing to help if she needs it — even if sometimes they don’t know how.

“I’m building a communication tool — my core strength is communication,” she explains.

“I would rather over-communicate.”

Crown also notes the importance of getting the terms straightened out right from the beginning, and of getting them down on paper.

His investors are not necessarily well-off people or those with business or investment knowledge, he says.

So you have to be sure to manage everyone’s expectations before you accept any money.

“You can’t let the dollar sign distract you from that”, he says.

It’s important to explain in simple terms how many shares they’re getting for their investment, and that those shares may be diluted later.

“Sometimes that’s enough to deter them,” Crown explains.

Crown describes what he calls a “hiccup” in his friendly funding, when an investor was offered a property-investment opportunity and asked to be bought out early.

“You don’t want to take it to a legal situation right away, but we did set expectations upfront,” he says.

In this case, Crown was able to remind the investor of the concept, and that “was enough to get him to understand where we were at”, he says.

“It’s about being calm and collected and not blowing your top,” he says.

There may be a legal contract in place, but when it comes to dispute resolution, it’s best not to start with that.

“That gets their backs up immediately,” Crown says.

“It’s better to assess and approach it in a calm and respectful manner,” he adds.

Monarc Global co-founders Royce Crown and Monica Zagrodny. Source: Supplied.

“I don’t live in anybody’s garage”

In Australia, it’s seemingly becoming more and more difficult for startups to secure early-stage funding, leading founders to turn to friends and family for lack of any other option.

Crown says you have to get that first round of funding, partly to show how serious you are, before going for VC or private equity funding.

“They don’t look at you unless you’ve done and friends and family raise,” he says.

“It shows you’re willing to invest money that’s closer to you rather than other people’s.”

In January, the KPMG Enterprise Venture Pulse Q4 report showed VC investment in Australia increased to top $1 billion last year, the total number of deals dropped to 114, compared to 132 in 2017.

At the time, Justin Lipman, investment director at Equity Venture Partners (EVP) predicted access to capital for early stage startups is only going to get trickier.

“If you’re trying to raise $25,000 for an early idea or early proof-of-concept, I think it might be touch going,” he told StartupSmart.

Anecdotally, Oxenham says most entrepreneurs she knows have secured funding from friends and family at some point.

In the Australian ecosystem, “we’re not fostering the seed investment”, she says.

“It’s a sad reality that if you can’t secure money through family and friends, the likelihood of you succeeding as a startup in Australia is minimal,” Oxenham adds.

And this can prove an even bigger barrier for older founders with families.

As a founder in her 40s with children, “I don’t live in anybody’s garage”, Oxenham explains.

Gumbley also notes how difficult it is to secure VC and private equity funding in Australia, especially when compared to other markets like the US.

You have to have good product-market fit, the revenue run rate has to be right, and the timing has to be right, he says.

“All of your moons have to align for it to right for you.”

Blood is thicker than water

While any founder with friends and family willing to back them is fortunate, this kind of funding does come with its drawbacks.

“One of the disadvantages of moving from bootstrapping to family and friends funding was the stress around every decision I made around money,” Gumbley says.

“I was more cavalier with my bootstrapped money than I was with anyone else’s,” he adds.

“The responsibility was stressful.”

In Gumbley’s case, decisions started to take him much longer. He would spend weeks deciding on each new hire, he says.

“I just wanted to be 100% sure I was doing the right thing,” he adds.

“People have chosen to believe in me, I wanted to make sure I did right by the investors.”

Oxenham says she suffered in a similar way.

“Running a company is stressful, and you can have your ups and downs,” she says.

“Usually, you turn to family when things aren’t going well, but I probably didn’t go to my family enough to start off with because I was worried they would worry.”

However, Oxenham is from a close-knit clan and for her, it paid to remember her family were more than investors.

“You can still share your fears,” she says.

“If you don’t have that trust in your family that they will be able to help you through the ups and downs, then don’t take their money.

“They’re there to help you and be part of the highs and lows … they will just give you a hug.”

And, if and when her startup is successful, Oxenham explains she would have regretted not having her family involved. For her, investors are not doing her a favour, she’s offering them a chance to invest in something that’s going to be huge.

“There’s no question it’s going to be a massive company,” she says.

“Why are you taking their money if you don’t think you can deliver?”

NOW READ: What’s the deal with equity crowdfunding, and should I do it?

NOW READ: Insurance, socks and social enterprise: StartupSmart’s 10 startups to watch in 2019