How Raising Money From 'Friends and Family' Can Seriously Damage Your Health

Building a company from scratch is hard. It's even harder when you opt to do so organically, steering clear of the more traditional, well-trodden venture capital route. The rule of thumb financially is to have a year's salary as a safety net, but once you've burned your way through that, you're probably going to need to raise some money.

Most startups begin with 'Friends & Family' (F&F) money. It's supposedly the easiest money to raise. Why? You have an existing relationship with these people, they know how passionate you are about starting this company and they want you to be successful. Chances are, once you weed out those legitimately with no spare cash, and the downright cheap aunts and uncles, you'll find some willing candidates.

The best piece of advice I ever got about raising F&F money was -- don't do it. I should have listened. Now I can reiterate with the same certainty that I'm sure the advice-giver, whom I chose not to listen to, had back then. Don't even think about raising capital from friends and family. It will only increase your number of sleepless nights and add to the number of anxiety related stomach dips and rolls that you will experience several times a day as part of normal startup life. Step away from the siblings...

Yes, the business desperately needs some cash, but there are other ways of accessing capital. Of course your granny wants to help, but do you really want to take her money? The same goes for your sister. What if she is having a hard time making her mortgage repayments next year? Don't you think she'll regret that $10,000 she invested in you and wish she could get it back? She only gave it to you in the belief that it would be worth a million dollars by the end of the year. Clearly that's not happening any time soon. Do you really want to have her staring at you across the dinner table with too tight a grip on her steak knife?

Instead of hitting up your actual family and friends, think instead of finding 'individual money'. Not to be confused with angel investors. Angel investors are sophisticated financially independent investors who look for medium risk opportunities. They seek out more established startups who have already proven some traction. They want an indication that this has the ability to be successful. If you're not at that stage then you'll struggle to convince angel investors to write you a check.

Instead, consider affluent individuals. They can be people you know, or can get an introduction to. They are not necessarily friends or acquaintances, nor are they accredited angel investors, just affluent individuals who might be willing to make a $5,000 - $10,000 bet on you and your mad idea.

I did take some money from friends and family in our first round of funding, which still keeps me awake at night, but the majority of that round was made up by those aforementioned affluent individuals. You still feel the same financial responsibility towards these people, but there is significantly less risk of being stabbed at dinner.

There are no hard and fast rules for meeting these folks - you just need to have a lot of conversations with the mindset that each conversation could turn into an investment. It's exhausting as you have to be constantly on your 'A Game' and always in selling mode, but it pays dividends.

I was introduced to a successful business man some time back, and told him, as I did everyone I met, about my startup Smigin- a language learning app for people who travel but don't have time to learn another language. He downloaded the app on the spot and promptly forgot all about it and me, until later that year when he was in Paris. He pulled up the app and was able to order wine without the Parisian waiter rolling his eyes at his lack of French. He called me when he got back to the US and wrote a check.

Opportunities abound and there are plenty of individuals willing to make small bets. You just need to tell your story to enough people with enough enthusiasm and someone somewhere will pull out a checkbook. For a founder, it's the modern day equivalent of pulling out a magic wand. Raising money is not for the faint of heart, but by sticking to people you don't spend Christmas with, the whole experience will be significantly less damaging to your mental and physical health. You'll spend less on indigestion meds too.