Family, Friends and Funding: What You Need to Know
There’s a lot of talk about “early round” investors in startups, but the true “early round” honors usually go to founders, family and friends. If you include yourself in the “founder” leg of that triad, what do you need to know to get the other two legs – the friends and family – involved in the best way possible?
You have some things going for you and perhaps against you when you start to approach those who know you best for money. In many ways, what will later be important to angel investors and venture capitalists, are also important to potential friends and family investors.
First, they need to believe in you. Ultimately it is your ability, enthusiasm and commitment that they are putting their money in, so a self-check should be your first step before you approach your family and friends.
Have skin in the game?
Are you sufficiently convinced that you have put your own money into your project? If so, gauge your level of commitment. Is it at a mortgage-the-house level, or just a couple-of-months-worth-of-spending-money level? Also, be sure you and your spouse are equally committed and prepared for the journey you’re about to undertake.
Second, you need to have a minimum viable product. “Ideas” are something you mull over. Viable products are things that can warrant investment. Don’t ask your family and friends for money if all you have is an idea. Too much time can be wasted and too much money burned between having an idea and having an actual product or service that people would be willing to pay for.
If you are committed and have an MVP, you need a business plan. It may not be fully developed, but you must have a roadmap where you’re headed. It’s unfair to ask people to fund your journey if you don’t have a map; they will just be paying you to wander the desert. The business plan will give you the overview that you need to communicate to your friends and family.
For example, are you just asking for seed money to get a “mom-and-pop” venture started that won’t do much more than provide your family with an income, or are you about to launch a business that has the potential to scale up? You need to understand where your business lies on that continuum.
Loans or shares?
When all these pieces are in place, you have an important decision to make: are you asking for loans or are you selling pieces of your company? This is the point when everyone involved needs to pivot from a personal relationship to a professional relationship. Whichever route you choose to take, it is a very wise idea to get a lawyer involved. For loans, be fully agreed on terms and if you are giving away ownership, be certain you know what that means for both today and tomorrow when you may seek additional investors.
If you were to present your startup in front of a group of true venture capitalists, you would be armed with a presentation called a “pitch deck.” It’s a series of slides that covers these basic topics:
- Your company purpose
- The problem
- Your solution
- Why now
- Market size
- Product
- Team
- Business model
- Competition
- Financials
With family and friends you may not have to make a presentation that is quite as formal, however you need to be able to address all of the above points. If you are unclear on any of these issues, you aren’t ready to ask for other people’s money.
One final word of advice: The way you approach your friends and family will set the tone for your relationship, should they decide to invest. If you start out on a professional footing, it will be easier to maintain that kind of relationship going forward. If they see themselves as merely doing you a personal favor, your relationships will forever be haunted by personal issues.
