Friends vs. Family: Who to Raise Funds From
When launching a startup, many founders will try to raise funds from anywhere possible, including their personal network of family and friends. These are crucial sources of funding in a startup’s earliest stages, and a founder can rarely afford to be discerning when deciding who they should raise from. However, raising from a family member compared to a friend can impact a founder’s long-term success.
A Significantly Higher Scaleup Rate
As part of our ecosystem assessment work, Startup Genome surveyed over 100,000 startup founders directly, asking if they had received or could access financial support from family or friends when launching their startups. Research in the Startup Genome Scaleup Report determined that founders with access to financial support from friends had a significantly higher scaleup rate (defined as an early-stage startup that receives a valuation of $50 million+) than those who said they could receive support from family.
While we can only speculate the reason behind this, we can infer that well-off friends may be a source of motivation and advice, role models, or source of funding or relationships to other investors. Still, for most founders, raising funds from family is much more common than raising from friends. Below we see how much more common this is at a regional level:
This is an understandable dynamic — due to the nature of familial relationships, founders are more likely to turn to immediate and extended family rather than friends. There is also likely a cultural element: in some societies, founders are more likely to be embedded in extended family structures and family members might expect to be included in an exciting business venture. This may explain why, for example, Latin America has by far the highest rate of founders who reported they had or could rely on family members for funding. Conversely, in North America it is common practice — even expected — for founders to approach friends for financial support.
A New Approach to Networking
But these findings don’t necessarily mean that aspiring founders should go out and befriend more rich people. Rather, they should consider their approach to networking. This could include fostering relationships with more local founders and startup ecosystem stakeholders, who aren’t necessarily going to be the wealthiest individuals, but can provide guidance, make introductions to investors, and are more likely to invest in a startup themselves as fellow entrepreneurs who see the value of cultivating a strong local startup ecosystem.
This concept is supported in our data. From our surveys we see that founders who said they had or could receive financial support from friends also reported more relationships to local investors.
Similarly, founders who said they had or could receive financial support from friends are more likely to have more senior advisors with equity stakes in their startups. This again supports the premise that founders who befriend local startup stakeholders will also benefit from the larger network of qualified mentors they gain access to.
The Scaleup Report analysis also shows that the more senior advisors with equity a startup has, the more likely their chances are to produce a scaleup. For all startups founded by someone who can receive financial support from friends, about 22% have 3-4 senior advisors with equity, compared to just under 14% for founders who could receive support from family. The 3-4 advisor figure is the preferred benchmark in this comparison because very few startups have more than five advisors with equity.Key Takeaways for Ecosystem Leaders
If success rates increase for founders who have friends willing to invest in their startup, then this means ecosystems would benefit from driving increased connectedness between startup stakeholders. In practice, this means more networking events, opening designated startup coworking spaces, encouraging startup support organizations to collaborate and cross-pollinate, and a host of other measures that can be taken to get founders connected.
To discover additional factors influencing startups, read How Does Founder Motivation Impact Success?