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If You Thought The ‘Friends & Family Round’ Was Privileged, You’re Right

There’s a problem with the standard investment playbook and you already know it. 

It’s called the ‘friends and family round’ of raising funding, and it’s only for the privileged few. It is recommended as the first step to funding a new business. 

It’s got to stop.

As a startup, you know that Angel Investors are the primary source of early financing. Problem is, when getting advice on how to finance your new company, people will suggest you “start with a friends and family round”. But there is bias and privilege involved with this type of funding.

The friends and family round is not the sole means of funding a budding business. The investment community must address the lack of start-up funding options available. 

Not everyone has wealthy friends and family

The friends and family round is when you approach people in your immediate network for financial investment in your business. It comes either as a gift, loan or in exchange for equity in the company.

It is the ‘pre-seed’ round. This is the round before you raise money from professional or semi-professional investors, like Angels or Venture Capital firms. A standard F&F round raises anywhere from $10,000 to $150,000.

Here’s the thing.

Not everyone has wealthy friends and family and can raise this type of capital in a pre-seed round. The assumption that everyone can do this creates bias, privilege, and discrimination in the system. Women, People of Colour, Indigenous Peoples, LGBTQIA2S+, and marginalized groups feel this disadvantage the most.

Startups that can’t capture funding in a F&FR are unable to grow their businesses as quickly as those who do. They also face judgement when approaching formal Angels and VC firms due to their lack of ‘pre-seed funding’ already gathered.

Connections Impact Business Success:

  • social connections increase the flow of information, which
  • invites other connections that can lead to more investment
  • result: more likely to raise “series A funds”

In the long-run, this problem perpetuates an even bigger issue. The gap between women, people of colour, and white male startup success widens. Research shows that startups that get support from ‘connected angels’ perform better over time (Venugopal, 2017). This creates more barriers for women entrepreneurs like you.

The investment community needs to prove business viability another way

Those who recommend going after this funding assume it’s ‘easy money’ and ‘everyone has access to wealthy friends and family’. Articles say things like:

“This is your best chance to secure money to get the business off the ground. If your friends and relatives don’t want to give you money, who will?”

The funding community has come to see the F&FR as social proof. So, imagine the women-run business who pitches to investors for seed funding and can’t explain why they don’t have 50K of friends backing them.

This is a barrier, particularly for those who identify as women, people of colour, Indigenous, LGBTQIA2S+, and other marginalized groups. This assumption that everyone’s social network has money to invest in their business sets up marginalized and minority groups to fail before they have even started.

Without friends & family money, women rely on savings

Women disproportionately rely on personal credit to fund their businesses. This puts them and their businesses at a disadvantage in starting up and growing.

Wealthy men are accessing:

  • friends and family funding
  • Angel Investors
  • VCs

Women are using:

  • personal credit
  • lines of credit
  • RRSP savings

This finding is sometimes reported as if it is a choice or preference as opposed to a necessity.

How To Fix The Problem

Recognize The Privilege

The first step to breaking down this challenge is to recognize it exists. Once we do, we can reduce the importance of the F&FR and open up a conversation to more solutions for less privileged groups.

Reduce Barriers to Access to Capital

Financial institutions need to remove barriers to funding for women startups.

Traditional banks are supporting women in the wrong ways. Instead of pouring money into training and skills courses for women, make it easier for them to access capital.

There are many women-identified business owners who are ambitious, confident and know what they’re doing. They don’t need another workshop – they need money.

Venture Capital Culture Must Move Away From F&FR As Standard Pre-Seed Funding Model

VC culture must move away from using F&FR as the standard model for pre-seed funding. VCs should work with organizations in the community that work with early-stage entrepreneurs (like CanWCC) to nurture deal flow.

They should use their influence and network to help pre-seed companies secure funding and resources. In any other industry, investing in diverse sources of primary resources and the talent pipeline is part of business operations. It should be in venture capital, too.

[Women] don’t need another workshop – they need money.

As funding becomes available to less privileged groups, the investment community will diversify. The system will improve.

It’s time that funding communities are for everyone. That way, great business ideas will be prioritized over networks of wealth.

Great ideas > privilege. That’s what we’re striving for.

Join us if you agree.