At last week’s Secrets from Silicon Valley event in Soho, Sarah Lacy shared her insights (but, disappointingly, very few secrets) from her years working as a West Coast business reporter.
Promoting her new book, a British imprint of the well received Once You’re Lucky, Twice You’re Good, Lacy was affable and insightful, and seemed to genuinely have the inside track on the likes of Mark Zuckerberg and Digg’s Kevin Rose.
In an aside, she noted that in the Valley, most people are happy to ignore the received wisdom that you shouldn’t involve your friends and family, either as employees or investors.
Most would assume that we’re even more cautious about that kind of thing here in the UK, what with all the warnings about ‘mixing business and pleasure’. The extent to which family life can be considered pleasurable might be debatable, but most would consider it wise to have some level of separation in their personal and professional lives.
Last night, I was asked about seed funding at the London leg of the Autumn season of Startups Live. I made an almost throwaway comment about the ‘friends and family round’ after a Barclays representative had insisted that his bank were still lending.
I was trying to emphasise that many small businesses will need only very limited capital to get off the ground. Yet even for relatively paltry levels, I doubt that many banks will be lending at the famed ‘2007 levels’ for some time yet, so personal savings and yes, the dreaded friends and family round, might become a more common feature of UK enterprises over the next few years.
A recent bit of research from i2m found that almost 40% of UK businesses seek under £10,000 in start-up funding. In the market research software firm’s survey of 800 budding entrepreneurs and small business owners, the majority clearly believed that they required relatively small levels of initial investment, with more than two thirds looking for under £100,000.
In response to the survey, which will be released in full during Enterprise Week, Permjot Valia, business angel and member of the British Business Angel Association said: “This survey does put things into perspective. The engine for entrepreneurial Britain is ‘friends and family.’”
He stressed that more needs to be done to help start-ups requiring less than £10,000 and that the Small Firm Loan Guarantee should be made easier to access. This all sounds sensible, but if he’s right about friends and family becoming more influential as investors, what will it mean when these firms reach the growth stage?
Beyond the obvious pitfalls of working with your nearest and dearest and the potential for both relationship and business breakdown, the biggest mistake entrepreneurs make when involving these kind of investors is overvaluing their firm.
If the business is successful enough to warrant a second round of funding, the new investors will often make it a ‘down round’ by evaluating the value of the company professionally – and realistically. Friends and family who have equity will be diluted, and also ranked behind the new investors who will normally want preferred stock.
Worse, the entrepreneur will probably have to make it up to his nearest and dearest, perhaps by offering them some of the founder’s shares. I wonder if one of the more obscure results of the banking crisis will find Growing Business hearing about a lot of disgruntled seed investors in a couple of years’ time.
