What is the difference between raising money for your startup from friends and family versus angel investors? 

Both friends and family and angel investors are common sources of funding for startup businesses. They may focus on funding very early-stage startups. Yet, they may have some fundamental differences. Let's check them out...

Friends & Family Versus Angel Investors

This isn't an and or choice. It can be for those who don't have friends and family connections with the capital to invest. Or, for those who self-fund and can jump from a friends and family round to right to VCs. Or, if you can bootstrap all the way. More typically these are two steps on the same path. If you are on the fundraising journey, you'll first raise from your personal network, and then, move to angels, and then, venture capital firms and other sources of financing.

Raising Money From Friends & Family

Who Are they?

You probably have quite a few people that fall into this category. This may include immediate family, extended family, close friends, former schoolmates, ex-workers and bosses, and all of the friends and family members of those in this immediate group. 

You may have some professional investors within this group. Some may even be angel investors. However, for the most part, the majority of first-time entrepreneurs will find this sphere of contacts is mostly novice investors. They may have a 401k, mutual fund, some public stocks in their portfolio. Maybe even some gold, bitcoin, or real estate. Few may have invested in a true startup before. They are novices in this arena. 

One great advantage you have here is that they already know, like, trust, and believe in you. Even if this is just an introduction or referral to another person, there is an inherent trust that comes along with that. This is 90% of the challenge to get funded.

Before you even look for friends and family make sure that you kickstart your story with the best pitch deck template so that you come across buttoned up.

Deal Terms & Motivation

Friends and family are often primarily driven to invest in you because they want to help you. That's a huge plus in your favor. It makes everything easier from setting terms to closing the round. They also want to improve their own finances, and don't want to miss out if they see you are onto a great thing.

This may be a casual arrangement where they personally loan you funds. It could be a formal partnership. Or well-structured debt or equity investment. In addition to the money, they may be able to offer you a lot of insight and emotional support along the way.

What You Need To Raise From Them

Sometimes all you need to do is to ask for help. In other cases, they will expect you to present a well thought out idea. Some may want a real business plan or will appreciate a good pitch deck presentation. This can be great practice for pitching to angels and other investors in the future.

Raising Money From Angel Investors

Who Are They?

Angels are individuals who invest in startups. They typically invest alone, though, they can also be a part of larger angel investment groups that pool money to have more impact and spread risk. Angels may invest alongside their friends and peers who are also angels. Or, they may invest through startup accelerator programs and crowdfunding platforms. 

In contrast with friends and family or VC fund partners, angels are typically semi-professional investors. They may be very accomplished and have started and exited companies of their own in the past. They may have invested in dozens of other startups. Though, they are often doing this part-time while pursuing other business-building activities. As such, their expectations are higher than friends and family, but probably not as stringent as institutional investors and lenders. 

You often won't have an existing relationship with these investors. You should be trying to meet, connect, and develop them months and years in advance. If you haven't, then you need to fast track this as naturally as possible. Grab a coffee, eat together, etc. In addition to loving your business idea and plan, they also need to get to know, like, and trust you. Especially as they are often investing at the Pre-Seed and Seed stage when there is far more risk, little or no collateral, and no revenues or profit yet. 

Deal Terms & Motivation

Angels are often inspired by the success of VCs and other famous celebrity angel investors. So, expect them to be looking for big returns. They also want to look smart by making great investments that really pay off and they can brag about later. Many are also heavily driven by having an impact and helping others. Especially, if they have been founders before.

Expect tougher deal terms than when raising from your friends and family. They may have a checklist and system they have used and proven themselves. Or, they may be trying to mimic what they see VCs doing. 

They may invest for a sizable piece of equity or via a convertible note. They may be completely hands-off and just let you do your thing. Or, they can be more active and very valuable in providing support, advice, introductions, and other resources. 

What You Need To Raise From Them

Again, the bar is going to be higher with angels than your friends and family. You should be prepared for a professional fundraising pitch and process. You need to at least be equipped with a pitch deck, executive summary, one-page business plan, and an action plan.

BIO

Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by 'Shark Tank' star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today's way of raising money for entrepreneurs. 

Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online. 

Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake). 

Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and at NYU Stern School of Business. 

Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.