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EdTech Startups: Beware of “Friends & Family” Financing

friendsfamilyfunding-top EdTech Startups: Beware of “Friends & Family” FinancingSeveral decades ago, The Beatles crooned that life was a lot easier — even if you sang out of tune — if you could just “get a little help from your friends.” Well, far be it from me to push back against one of the greatest and most influential rock groups of all time. However, it’s probably true that even Yoko Ono would agree that when it comes to launching an EdTech startup, trying to tap friends and family for some funding help could be the beginning of a long and winding road that leads to, well, disaster. There are a few reasons for this all-too-common pain and suffering:

  1. Lack of Experience

While it’s (obviously) true that investors have capital to invest, it’s not true that people with capital to invest are, in fact, investors. On the contrary, unless investing is something they have experience with — and we’re talking real professional experience here, not being a “master negotiator” when it comes to buying a car or freezer — then it’s only a matter of time before they start to get very, very nervous; and probably want to pull up stakes and retreat to safer investment terrain.

Of course, this doesn’t mean that legitimate investors aren’t going to want updates and reports, since that’s part of the deal. However, it does mean that they have experience playing the long game, and understand that most startups don’t break even and start to be cash flow positive until well after their first birthday.

  1. Micro Managing

It’s been said that the road to hell is paved with good intentions — and apparently, friends and family financing uses the same construction crew. Why? Because it’s usually only a matter of time — and it could literally be days after the cash infusion — that (so-called) investors start dealing themselves into a poker game that they weren’t invited to. For example, they may start to “advise” you on everything from what technologies to invest in, who to hire (“my son-in-law is a heavy equipment financing wizard and would make a great CFO”), and so on.

Yes, it’s fine — and often valuable — for legitimate investors to provide guidance and make suggestions based on their personal experience, and insights they’ve gleaned from peers and partners. However, they neither seek nor want a seat at the poker table, because they’re investors — not executives. They don’t want to acquire a business. They want to make money!

  1. It’s very, very difficult to say goodbye.

Sticking with musical inspirations — but switching genres and fast-forwarding a few decades — in the 90s, R&B giants Boyz II Men hummed that “it’s so hard to say goodbye.” Well, if they funded their musical journey via friends and family, they might have changed that lyrics to “ahhhhhhhh!!!!!” (yes, it’s not as catchy, but the truth has a certain resonance).

Here’s the thing: terminating an investment relationship with a friend or family member is almost impossible to do without severely — and perhaps permanently — damaging the relationship. It can even cause conflicts between family members and groups of friends who don’t have any skin in the game, yet feel compelled to take sides.

The Bottom Line

The Beatles were right: we all need a little (or sometimes, a lot) of help from our friends. But when it comes to igniting your EdTech startup, tapping friends and family for capital is often one of those regrettable “it seemed like a good idea at the time” ideas. At the very least, you should exhaustively explore all other viable funding options, including seeing what’s available in the alternative lending marketplace, and discovering what the crowdfunding space has in store. Good luck!

  • Varadu Sridharan

    Totally agree with this post. But friends and family still are very important for EdTech startups to get their first customers.