Love Money is Dead
It’s the same story for almost everyone building a startup.
You have an idea which you think is amazing, but you don’t have enough money in your bank account to finance your minimal viable product (MVP). Now for the big question: where could I find money?
For more than a decade most startups have followed the “classic path”:
- 1st: Personal / Love Money
- then: Business Angels
- then: VCs
It’s easy for anyone to say “go find some money”, but the reality is different. Entrepreneurs should first invest in their own ideas by putting money into the company and should find their first round of investment without nothing more than a PDF, or at best a working prototype.
However, if you are an entrepreneur you should know that without any track record and professional network, convincing an investor might be tough.
Here’s the easy solution: ask your grandma! She may agree to give you a part of the initial seed fund — what we call love money — to start your company.
By using this metaphor, you can easily understand at a base level what “love money” represents. By simply asking for a financial investment from the ones who love and support you (loving them in return isn’t mandatory) you can potentially get enough cash to bootstrap your idea. In theory, that’s perfect. You’ve got cash and no official or legal obligations to report to your investors.
But… there’s a but.
We spoke about the pros of the love money concept, however there are a few cons that have to be highlighted:
Weird relationship
First, you should understand most importantly that love money gives you more obligations than you could have ever expected. Investor reports and board meetings are usually a big deal; these are the monthly/bi-monthly meetings with the only people you have to report to since you are now your own boss. These meetings are a great opportunity for you to gather all the data you can about your startup’s progress and organise it into a great report, forcing you to synthesise the information about your company to make it understandable to those whom have trusted you with their cash.
But with “friends & family” investors, this homework often falls apart — or just doesn’t manifest at all!
Imagine yourself having an investor meeting every time you’re at a family dinner or having lunch with a bunch of friends. The stakes are high (over steak) so you need to bring your A game to ensure investors are well informed and happy, and it helps you to understand and assess your startup’s progress. Otherwise your relationship with your shareholders could migrate to a weird hide & seek game where you’ll avoid to speak about business during other events.
If you had in mind to add your wealthy step-family or your wife: forget it! Same problems, or worse.
Advisory & Network
Second point (which is very important) is the feedback that your investors can give you, aside from just money he/she is putting in your baby.
Especially in the early stages investors are a gold mine of advisory tips and professional networks. Your first investors are usually your first source of exploring new networks & knowledge. They will open doors for you, giving you the opportunity to build your credibility. In many cases your investors will indirectly be the source of your first revenues through making partnerships from people they know who might be interested in investing or assisting otherwise.
The social factor is also important. Professional investors have a network of their own advisors, professionals, and investors, often a very strong one cultivated by years of work and experience.
With your fundraising, employ a strategy to get only business angels (BAs) who can help you raise more money than just using love money. I remember a couple of deals where the first business angel helped to persuade the rest of the hesitant group, unlocking bigger funds and opportunities.
With love money investors, your family or friends’ contacts might have a decent network and good advice, but it may not be as well honed as professional investors (unless of course your grandma is a professional investor!). Professional investors are better to get involved with, especially if they’re specialized in your industry, product’s market or target, which could be a better environment to grow your business and your professionalism in.
I’m not underestimating your uncle that made a fortune building bathrooms, however he might not be the best person to sit in your startup’s investors board.
So.
As you may have understood, we have strong thoughts on the consistency of using love money during your venture’s early stages.
While love money may have pros regarding the simplicity of the initial fundraising process, allowing you to keep focus on your product, it can also impact on your capability of building a strong network, opportunities and sound business practices.
This final word might be to have a smart mix of profiles in your investors; mixing sleeping partners & active investors who will boost your velocity.
Finding these active angels is an another subject… actually it deserves an article for itself. Let’s speak about that next month.
