By Nevin Shetty
Asking others for money can be uncomfortable. No one particularly enjoys asking their parents for help with a loan payment. But what about asking your uncle for $50,000 to help grow a business? Well, that’s a whole different ball game.
In the U.S., funding from family and friends accounts for about $60 billion per year – it’s more than startups receive from venture capitalists and angel investors combined. And apart from personal savings, it’s about the most accessible source of funding for early stage companies. But just because your family and friends might be able to invest, doesn’t mean they should.
Here are three things to consider before you approach you attempt to get startup funding from family and friends.
1. Go Through the Normal Business Flow
Just because you’re Aunt Betty’s favorite person — and admit it, she likes to spoil you — doesn’t mean you should accept her funding off the bat. To successfully raise startup funding from family and friends, you need to go through the typical business flow. This means creating a full business plan with a budget, predicted figures, market research, competitive analysis, and SWOT analysis (an analysis of your company’s strengths, weaknesses, opportunities and threats).
Why is this important? Well first of all, it is more likely to convince your family and friends that your idea is worth it; just like a traditional venture capitalist or angel investor, your loved ones will be more likely to believe in you if they see your mission and financials clearly laid out.
Further, it will help you structure your business correctly from the start. It’ll guide you on deciding where to allocate capital — should you rent an office, hire employees, spend it on marketing, or do all three? Additionally, thinking through these questions beforehand will make it easier to deal with service providers like lawyers and accountants.
Lastly, having a complete business plan will serve as a blueprint for when you need to apply to an accelerator or incubator program, or pursue VC funding down the road.
All in all, following the normal business flow will ensure you don’t cut any corners and find yourself unprepared later on. You should be equipped to pitch your family and friends in the same way you would with investors, because while Aunt Betty might be easily wooed, the rest of the business world won’t be if you ever need additional funding later on.
2. Look for People Who Can Advise You
While some friends might give great relationship advice, not all of them will be qualified to give you business advice. So when looking for people to invest, consider asking those that can advise you on important decisions — think accountants, lawyers, or seasoned entrepreneurs.
These people will not only point you in the right direction, but they’ll also scrutinize your business structure and processes in the same way investors would — something that forces bootstrapped entrepreneurs to take off the rose-colored glasses, and make adjustments to help the company flourish.
When approaching others for funding, remember: environment is key. Keep it professional. The context and surrounding in which information is conveyed is almost as important as the information itself. Even if you have a close relationship, ask to set up a meeting with the person you’re seeking funding from. Generally a coffee shop works best; it’s not too formal but formal enough.
Come prepared with your business plan and pitch ready. If you have insight into their financial status, make sure you’re not asking them to give more than they can handle. And if you don’t, let them know which amount you’d like to reach, and see what they’re most comfortable giving.
3. Become Well-Versed in the Startup Funding Landscape
Most successful entrepreneurs are avid readers. When Warren Buffett first began his career, he read between 600-1000 pages a day. Bill Gates reads 50 books a year. It simply validates that great entrepreneurs are in the constant pursuit of knowledge. And if you’re going to raise funding from family and friends, you’re going to need to continually read and learn as well.
When the going gets tough, non-specific funding agreements are the quickest way to hurt relationships with your family and friends. Before you approach anyone, it’s imperative you understand the various ways to go about funding a startup and chose the method most suited for you. Are you going to raise on a convertible note or a priced round? Are you going to have advisors? Are you going to give them equity? Or are you simply going to ask for a loan that you’ll pay back with interest?
Don’t play anything thing by ear. Be sure to sign a formal agreement as well, which covers any risks related to funding, so everyone knows exactly what they’re signing up for.
Seeking funding from family and friends is accessible, but it doesn’t make it easy. It’s important for entrepreneurs to cross all the t’s and dot the i’s, in order to keep both their business and relationships in check.