Right? I see this a lot and it's often an investors first response when asking for small seed rounds: "Well have you considered raising money internally? Ask around your friends and family".

If I had friends and family that could just toss me a $250k I don't think I'd be in this position.

Reminds me of Mitt Romney's entrepreneurial advice: "Borrow money if you have to from your parents." Such a disconnect. Must be nice to have parents to be able to bankroll your businesses, Mitt.

My parents (who owned a house) offered to lend me five figures to buy a house, together with my savings I think that would have been enough to bankroll a small business. I earn more than they do these days. I think Mitt's advice is valid for middle class families who don't max out their credit to spend on cars and holidays.

Why would you immediately think it was my parents? Sigh.

I don't think it was a slight on you. Just the idea that some people (again, not you) think that it's easy to get access to this sort of cash (or even 1/10th, or even 1/100th of it) to "bootstrap" themselves to success (bootstrap in quotes because relying on cash from others isn't equally feasible and I'm not sure if it's really pulling yourself up from your bootstraps).

Why would you immediately think the poster was referring to you? Seemed directed at Romney.

But they have to ask, because if the answer is no, that's a huge red flag. "You are willing to lose my money, but not your friends or family?"

I would say an answer of "yes" is a huge red flag. A good CEO needs to understand risk/reward. VCs are investing in risky things, and thus distribute their cash amongst hundreds of start ups, fully aware that most will go to zero. It doesn't matter because 1 will go to $1 billion.

OTOH, family usually can't afford to lose what they give. They make emotional decisions, not financially rational ones.

If a CEO can't distinguish those entire distinguish those entirely different cases I doubt their financial acumen. You go to VC for moon shots, to the bank for proven business models, and to family and friends to build a family 'lifestyle' and asset heavy businesses (asset heavy so you can recoup some of the money if your business fails).

No one rational should believe that their startup will succeed no matter what. We know, with certainty, that it almost certainly will fail. It's a flutter - a bet on a fabulous future (fabulous in terms of success, making a difference, huge wads of cash, whatever). If VCs expect that kind of naivety, well, you get what you pay for. How many other ways will that CEO be naive?

If this is true, then I'm even more wary of ever seeking VC money than I was before. No way in hell I'm asking my middle-class and lower-middle class family members to support risky venture X. That's the job of the wealthy venture capitalist, who can afford to lose X dollars on my venture (that's the whole rationale behind the "accredited investor" thing, as much as I disagree with the regulation).

If they expect someone else to do their job, I wouldn't want anything to do with them, anyway.

"You are willing to lose my money, but not your friends or family?"

"Yes. Because if I asked my family to fund a business venture, it would be something bland, low-risk, and low-return. Exactly the kind of things you guys can't stand funding."

An investor should be willing to make a "10% chance for a 100X return" type investment, but no, I wouldn't usually suggest that to my friends and family unless the amount of money was not significant to them. I don't think that's a red flag; investors have different risk tolerances for good reasons.

What you describe is a basic application of the Kelly Criterion: https://en.wikipedia.org/wiki/Kelly_criterion

It helps you determine how much of your bankroll you can wager depending on (1) the odds, and (2) the size of your bankroll. It's the same reason why you shouldn't (mathematically) play the lottery (when it's expected value is actually positive) unless you're already filthy rich. The same math applies for hyper-risky startup investing.

...That's kinda stupid. Maybe no one was in a position to loan that much money. Or maybe nobody wanted to? Could be any number of things.

The "No" is to the question, "did you ask your friends and family?"

Raising $250k from your close network should be very easy for anyone hoping to be a founder. If you can't get 10 people to write a $25k check, you should reconsider founding a company.

It's really stupid what you are saying. Some people live with $25k per 10 years... Not everybody is rich or knows rich people. You just need to be smart to start a good company. Also only the "american" style starts with huge amount of money and burns it. It's not always good to just "fail-fast". Sometimes business needs some time, time to grow, not just "put a lot of money in it and if nobody likes it it will die."

> Some people live with $25k per 10 years.

Not sure what that means or how it's relevant.

> You just need to be smart to start a good company.

Short answer is, No. Longer answer is, if you're really smart a) you realize what I said is true and b) you'd figure out a way to raise the money.

> you'd figure out a way to raise the money

They do. They go to VCs.

Or they don't need since their business is making revenue since day 1. Okai maybe not since day 1, but its making revenue. As already said there are also businesses where you don't need any funding. Business 2 Business models mostly don't need that much money with a great idea.

If, for your first round, you end up with 10 individual investors each forking 25k, you'll end up with board management issues.

1 with 100k, 2 with 50, 4 with 12.5 : yeah, why not.

With that, you have one clear lead, with whom future investors and bank can relate to.

My bank wouldn't have bankrolled us if we had 10 "small" investors from the start.

[This said, I'm no expert on the subject, just anecdotal evidence...]

None of those investors would get a board seat.

Yes, your breakdown is both preferable and more likely. But my point stands.

Your point stands, however, I didn't mean "board" management literally. I should have said "shareholders management". I'm not entirely familiar with US corporate law, but on roman based civil law, 10 investors with 25K of seed capital (ie non trivial amount of % votes) can get messy.

(although we did create a board with the breakdown I suggested, because we were lucky to pick the "right" FoaF investors, attorneys and counsels)

Under U.S. corporation law, shareholders have very little ability to affect corporate management, unless they own a large enough stake to impact board elections. In a start-up valued at $1MM post-money, these 10 angels are not going to own more than a couple percent each, while the founders will control 75 percent of the company. The founders will have more than enough voting control, assuming they vote together, to ignore the investors.

He might be talking about Canadian law which I would admit can be goofy with respect to startups. But I still don't think it's that big a deal.

Ya, we were lucky in that regard. I'm not really sure what we would have done otherwise...

I could raise $250. Maybe $2500. :-P

I would never ask my middle class friends and family for funding on such a speculative venture to begin with. I would ask--if I had rich friends and family, and it was a great idea. This was not, but I don't understand most fashion anyways.

See the comment above. It's not "Friends and Family." It's "Friends and Family who qualify as accredited investors." This is not your extended family giving you a $500 or $1000 to pursue your dream.

This is a misconception. Friends and family are allowed to invest in your company without being accredited investors.