Need Funding? Start with Friends & Family

Posted on June 12, 2014.

If you’ve ever thought about starting a business and tried to find funding, the first thing anyone and everyone will tell you is you have to start with friends and family.  This is of course after you’ve depleted your own resources.  Depending on the crowd you hang with, this could be easy or hard. But first and foremost, it must be a business transaction. 

Start by making a list of the people that have the ability to invest. Just like an investment in the stock market, these folks should be able to lose their investment and still be okay. 

·      Decide how much money you need and break it into units, These units will  become shares of stock. For example, if you need $50,000, consider issuing 10,000 shares priced at $5.00.  This is what they will get for their investment.  Remember that the valuation you place on this investment is directly correlated to the value of your company. If you sell 50% of the stock for $100,000, you have a “post investment” company valuation of $200,000, assuming no other debt or cash.

·      Set up appointments with everyone on the list. Just because they’re family doesn’t mean their time is not valuable.  One other option is to invite them all to your place of business or rent a conference room if you’re working from home.  That way you can field all the questions at the same time.

·      Once the appointments are set, prepare the same kind of presentation you would deliver to an impartial investor (business plan, projections, etc). Make it concise and make sure you include must have information such as:

o   Market Potential

o   Competition (and don’t say there isn’t any)

o   Why you

o   What expertise is still needed and your plan to fill the gap

o   Exactly what the money will be used for and the timeline and percentage of expected return

Once you have finished your presentation and answered all their questions, be clear about what the next steps will be.  Follow up with each person, one-on-one, and ask them for feedback.  Address any issues or concerns they might have and mitigate them.  And here’s the critical part- you need to ask them how much of an investment they would like to make. Do not walk away without asking for the money.  It may be uncomfortable but the reality is that few will offer without being asked.

By approaching friends and family as business investors first, they will view you as an entrepreneur, not a relative or friend.  And if they turn you down (and many will), try to find out why and continue to hone your business plan and presentation to address their concerns. 

If your first list of potential investors does not yield you the necessary amount you need, ask them for introductions to their friends.  You cannot be shy about asking for money.  If you think this group is tough, wait until your business takes off and you need institutional money.  This whole process will seem like a cakewalk.