Takeaways
- Don’t be afraid to ask friends and family for money.
- Do not forget to tell them how much of your own money and time you’ve already invested.
- While so much of your relationship may be built on blood is thicker than water or friendship is as thick as thieves, trust is always better when it’s on paper.
- Try to get a loan instead of an equity investment.
- Approach them with a detailed proposal as you would a bank.
- Keeping your investors updated should help with the process of asking for more money (if need be).
- They are a key source of investment for your startup but if not handled professionally and sensitively, can be your worst nightmare.
Many entrepreneurs are so passionate about their new idea that they are surprised when family and friends don’t line up to invest in their new ventures. Yet they tend to ignore this problem and move on quickly to professional investors. They don’t realise that most Angel investors and venture capitalists will also decline to be first if you have no commitment from friends and family.
Many entrepreneurs bootstrap or self-finance their business. But that doesn’t mean every founder saves up their own money, opens a line of credit, or seeks a bank loan. For some, it makes sense to ask friends and family for financial support and the truth is that friends and family remain the best shot that many entrepreneurs have to raise outside money to launch a business. If you’re thinking about asking friends and family for seed money, here are few tips for doing it right:
Get started first on your own time and money
We all know people who are good at talking but never seem to risk anything or find time to get started on the implementation. Every good entrepreneur needs to invest some money of their own, as well as sweat equity, to show credibility and leadership to others. Even family investors want to be followers, not the leaders. So invest some of your money too – no matter how little!
[READ MORE: 6 easy steps to securing a financially balanced future]
Write down your pitch
Unless your friends and family are professional investors, they probably don’t want to read a 50-page business plan. More likely, they will prefer to sit down with you over drinks and hear you explain your idea. To avoid being too informal, drawing up a 5 to 10-page document that sums up what you want to do, how you will do it and what you will apply the money towards. Such a summary ensures you’ve made important disclosures, such as the key challenges, risks and competition the business faces, and that your backers understand what their money is going to be put into.
Keep your documents and communications business-like
When you’re dealing with people you know well, it is easy to want to keep agreements informal out of concern that official documents might make things feel less friendly. But don’t be too casual, ensure that you keep in mind that this is for business purpose and all communications must be so.
Have a solid business plan
Whether you’re asking your best friend or going to the Mom, Dad or your favourite rich uncle, you need to treat the discussion like you would with a bank manager who wants to consider your loan application. You would not get a bank loan without a business plan, and you should not expect your family and friends to invest in your company without one either. Your business plan should include your financials, milestones, and metrics that make it clear how you plan to make your venture profitable.
[Read Also: 7 Tips for Financing Your New Business]
Show them your homework. Tell them the story of your product and business. Make them excited about it. This is the sales pitch, just as you might sell a customer. Say, “Let me tell you what I have learned while doing my research about this business” and then share the high points of your business plan research, highlighting the model for success.
Determine How Much You Need
It is easy to shoot for the moon when you’re riding high and just getting started on building your new dream company – but one of the purposes behind a Friends and Family round is that it is really meant to be just a kick-start. Rather than estimating the maximum amount of funding you can pull in, think strategically and logically instead. Build a four or six-month plan, and determine how much cash it will cost to buy all the needed inventory and assets, plus any financing you need for early-stage employees. By being very logical with your initial ask, you are in a better position to request additional money if the business is still going according to the plan in a few months.
Make a payment plan
How do you plan to repay your family of investors? If you are not planning to offer equity in your company in exchange for cash (a typical scenario with angel investors and venture capitalists), you will need to figure out a plan to pay everyone back, with interest, just like a business loan.
The plan should also include “what ifs”: What if you can’t make a payment one month? What’s the plan then? By having these issues worked out ahead of time, you’ll save problems down the road. Put it all in writing, too. A legal document is best and you need a lawyer to help prepare such to prevent future legal issues.
[READ ALSO: How to know when your debts have gone overboard]
Conclusion
Overall, friends and family should never be treated as an entitlement, or as a last resort. They are a key source of investment for your startup, but if not handled professionally and sensitively, can be your worst nightmare. These situations can bring new meaning to the old adage about the first tier of startup investors as friends, family, and fools. Do not let it happen to you.
