The most common external source of capital for very young businesses is from friends and family – literally friends and family of the founder(s), people the founders know, who in some way provide cash to the business.
Note that friends and family financing can be any color of money – a grant (a gift from grandma), a loan (hopefully with better terms than the bank), an equity investment or even bootstrapping, such as pre-paying for the first thing you are going to make. In fact, some types of crowdfunding could be considered the internet turbocharging of friends and family financing.
There are many reasons why friends and family provide capital, including making money, supporting the individual entrepreneur, paying it forward, excitement about the business itself, and interest in managing the business.
Sometimes the phrase is extended to Friends Family and Fools. As we like to say, one person’s fool is another person’s angel investor!
While some people consider raising money from friends and family to be a type of bootstrapping, we don’t talk about it that way here at 4CME. Friends and family is just the most common source of Other People’s Money (OPM), and we strongly encourage entrepreneurs to be thoughtful about it.