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Loss aversion and the three Fs

Loss aversion and the three Fs

Many startups find willing investors in family members – but not everyone is comfortable bringing personal ties into the equation.

Jil O'BrienEinstein once said, “Once we accept our limits, we go beyond them.” The last month has been all about testing the truth behind those words.

Certain parts of business planning come easily to me. For example, I can quickly and accurately sum up the challenges our fledgling business faces in terms of skills, time, finance and competition. It’s undoubtedly an important talent but I’ve come to the realisation that some of the biggest challenges we face with Borrowed Size aren’t tangible or quantifiable at all; they’re emotional obstacles and they’re not easily overcome!

It’s generally accepted that the three ‘Fs’ (friends/family/fools) front the majority of initial funding for both entrepreneurs and startup companies so when a family member expressed an interest in investing in Borrowed Size, we jumped at the chance of having the funds to order stock for our beta launch, get the first version of our e-commerce platform built and organise some digital marketing pre-launch.

As soon as the funds landed in our account, doubts about the wisdom of accepting investment from a family member began to creep into my mind.

I’m cautious by nature, you see. Not in the physical sense (I’ve happily thrown myself from planes and pushed my limits in various extreme sports) but certainly when it comes to money. The term ‘loss aversion’ perfectly describes my tendency to strongly prefer avoiding losses to acquiring gains. With ‘better to be safe than sorry’ as my mantra, my mind quickly descended into the myriad of things that could go wrong and result in losing the money invested in Borrowed Size.

I recognised that my fear was irrational and something I needed to conquer but realising the need to conquer something and actually doing it are two totally different things. The possibility of losing money invested in our business had begun to take up headspace I desperately needed to plan our launch and so I decided to weigh up our family investment situation with a good old fashioned pros and cons list.

On the positive side were the level of trust owing to an established relationship and the immediate availability of the money needed for our beta launch. The investor was not naive about the investment and had the knowledge and experience to make an informed decision, their expectations were realistic and they were confident in our ability to make Borrowed Size succeed.

I felt much happier about the investment after reviewing the list of positives but quickly moved on to the cons list which was, surprisingly, much shorter!

The possibility of tensions and negative effects on our relationship if things didn’t work out featured heavily. Neither a business or a relationship can survive with guilt at its core and that was my main concern with investment from a family member. I know that starting a business is tough and I’d prefer to have this person for emotional support as we tackle the obstacles in our business path than as a disheartened investor.

After analysing and re-analysing and over-analysing the situation, I came to the conclusion that I just couldn’t make my peace with a family investment. We’ve restructured the situation and negotiated a low-interest loan instead to cover essential costs for the beta launch. We’re definitely putting the ‘lean’ in lean startup but it’s a situation I’m much more comfortable with. As for dealing with my loss aversion, I’ve added it to my ever-increasing ‘to-do’ list!

Jil O’Brien is co-founder of Borrowed Size  and can’t decide whether she is a mother, blogger, or entrepreneur, but is usually all three at some point each day.