3F / Family, friends, fools

Non-professional investors often take a significant part in the financing of a start-up undertaking-up company. When starting up, the capital is often provided by family and friends. However, this group of investors looks at a business idea differently than professional investors. And this can also hide serious risks.

It's only natural that in a life cycle of enterprise you can count on different funding liabilities in different stages. As time goes by, there will be more and more knowledge, data and references about the operation of the given company. These are what are essential for all independent financing partners financing to make a decision.

However, it all has to start somewhere. One just planned or fresh established business does not yet have such a story. Most businesses are thus started based on the owner's own financial resources. In addition, of course, the entrepreneur invests his knowledge, ideas, visions and ambitions. In this circle, in addition to his own savings, the founder may rely primarily on the help of family and friends.

This is fine so far, but it is important to clearly see the risks inherent in financing from friends and family. Our parents and friends are not professional investors. There's a good chance they haven't made or judged hundreds of them business plans. They haven't seen a large number of entrepreneurial success stories and failures up close. They are not aware of the Financial Planning, the cash-flow with details. THE scalable with significance as the copyrights or the in brand building assessment of inherent risks is also far from them.

They are often emotionally motivated in banking lending or the venture capital and the startup ecosystem they also make financing decisions that are completely different from the criteria of other actors. And they and the company itself will suffer the negative consequences of this. Unfortunately, this phenomenon is not unique. Not so much that we call this 3F financing - that is, family, friends, fools.

What can we do to avoid the risks inherent in this type of investment? On the one hand, let's stay objective. Even if our family does not require us, we should still prepare a proper business plan. This shows whether the investment has a real chance for return or to repay the loan. On the other hand, before any financing of this kind, we should ask ourselves: knowing the risks of our own business, accounting, operational discipline, financial situation, would we loan it to ourselves?