Let's Stop the Friends and Family Round

I often joke that when people talk about "Friends and Family" as a source of capital, that my comment is, "Do you mean the people who ask ME for money?" But for most entrepreneurs this isn't a joke. Very few entrepreneurs have access to that kind of capital. And, I will argue, those who do, often do not create better companies as a result.

So, I want to stop this term and this practice.

There is one big exception. When you are on your third or fourth startup after a couple of exits and your friends/family are fellow investors and entrepreneurs, then that's a whole different story. What I'm against is the first time entrepreneur taking money from the novice investor. And, more importantly, I am very against the presumption that all entrepreneurs need to raise a "friends and family" round.

First-time entrepreneurs shouldn't take money from novice investors. You do not want to be learning together. It is also not your job as an entrepreneur to teach investing 101. I have seen many entrepreneurs derailed by novice investors who just didn't understand what they were getting into.

Entrepreneurs need external validation of their companies, preferably by customers. Easy access to capital doesn't necessarily made any idea better. In fact, it sometimes delays the hard lessons from the marketplace. I've seen that often when companies pitch.

If you have generous friends and family, take their money but not as an investment. Let them buy you dinner, a laptop or maybe even share some office space with you.

There is no better validation of the quality of an investment than someone putting money in your company when that person has seen many deals and has many competitive opportunities for investing.

Another reason I want to stop this idea of the friends and family round is that I want to fully appreciate that most entrepreneurs have creative ways to fund their startups in the earliest stages. There are so many entrepreneurs who have a side hustle whether it is part time work, consulting gigs, a constant AirBnB room in their apartment, or other creative ideas (however don't drive for a ride-share, the hourly return on that is awful). Why are side hustles not talked about more openly? I think we know why. Our startup ecosystem has a warped view of success, and that model of success favors people from privilege. Plus, because early stage companies are hard to assess, we assess them on one of the only metrics we have: how much money they have raised.

Fundraising as a metric for evaluation is has always been suspect. When I evaluate companies raising their seed stage round of investment, I have seen many times that those first time entrepreneurs who raised a friends and family round are often not in a better position than those who didn't. One thing is for sure, those who didn't raise a friends and family round have more ownership of their company and are better positioned for the inevitable dilution that happens.

There's a reason that round of investment is often called "friends, family and fools." Let's stop this practice.