Never Borrow Startup Funds from Friends and Family

In the beginning when the idea of some hot new startup idea is fresh in your mind, but may require considerable resources, you'll be tempted to borrow money from friends and family. You'll go on about how they'll be rich and how the idea is sure to succeed because no one has ever done it before, and there are potentially billions of customers.

But it's a bad idea - a really bad idea. Why? Because you're mixing the social contract with a financial contract (even if there's no physical contract involved).

There is a particular chapter in Dan Ariely's Predictably Irrational that deals with this problem indirectly. Family and friends are happy to assist you in all sorts of situations where you would normally pay someone (such as when you're moving, when you're sick, when you desire a special meal), but by offering to pay for such a service removes the social contract and introduces market norms. Mr. Ariely states it much better:

So WE LIVE in two worlds: one characterized by social exchanges and the other characterized by market exchanges. And we apply different norms to these two kinds of relationships. Moreover, introducing market norms into social exchanges, as we have seen, violates the social norms and hurts the relationships. Once this type of mistake has been committed, recovering a social relationship is difficult.

So turning your friend into your loan officer is kind of like offering your mother $300 for the wonderful Thanksgiving meal she provided. It removes the family/friend relationship and imposes a business relationship. You see the same effect when a friend or relative who has gotten involved in Amway, Avon, Herbalife or other network marketing business and suddenly you turn into a prospective customer. It creates social awkwardness.

Some of the side effects:

  • The person you borrow from will be watching how you spend money, even for things that aren't part of your business.
  • The person you borrow from will be watching how much effort you put into the business, to see if you're keeping up your side of the bargain.
  • The person you borrow sometimes starts advising you on how to run your business.
  • The burden hanging over your head of the repayment, creating awkwardness at social occasions.

So what should you do? If your new startup idea is so strong, give it a week. Sit on the idea and see if a week later you're still as stoked about it. Once the novelty of it wears off, you may not feel the embers burning as brightly inside you.

If the idea is still hot a week later, and you feel it's a sure fire hit, you'll likely need money, and lots of it to support all the users of your new website. I suggest as this point seeking Angel funding as a first step, unless you feel that you'll need VC megabucks. I'm no expert on this, so good luck. There are thousands of sources out there on securing VC/angel funding. One book I suggest due to its thoroughness on the subject is The Web Startup Success Guide by Bob Walsh.

If you're still thinking about asking Uncle Harvey for $10,000, think again.

Have you had experience with this? Please share your comments below.

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