There is no doubt that family and friends can be a great source of support – intellectual, emotional and financial – for many entreprenuers. While intellectual and emotional support can put a strain on the relationship, financial support can be especially challenging.
When thinking about starting a business, there are some initial capital needs that cannot be met by personal funds, the first place to look should be family and friends. Every situation is different but it may be easier (for some people) to attract investors who are willing to bet on YOU succeeding and not necessarily focus on the business itself. If there are people who believe in you and are willing to put their money where their mouth is you may do well to reach out to these people for money.
Now, this source of money may be the riskiest of all, you stand the chance of negatively impacting an important personal relationship or losing the money they faithfully invested . However, there are some guidelines that you can follow that may facilitate a positive experience for all parties:
1. TREAT FAMILY & FRIENDS LIKE REAL INVESTORS BECAUSE IF THEY GIVE YOU MONEY FOR YOUR BUSINESS AND EXPECT A RETURN ON INVESTMENT THEY ARE AN IVESTOR
Put together a full package including a business plan, deck, research reports and financials for your new prospective investor. Even if they do not read the whole package they will appreciate that you took the time and it shows how much you value the relationship – and their money – enough to work for it. Send your new prospective investor the package and allow them to have some time to review the materials, then setup a formal pitch meeting - with the deck. FYI: I may add some templates to get you started at a later date, stay tuned for an update.
2. CONSIDER THEIR FINANCIAL POSITION AND MANAGE THEIR EXPECTATIONS
Your family and friends undoubtedly have varying financial positions. So raising $1000 of equity capital from Aunt Jennie who is retired and has lots of money to live on, may be different from raising the same amount of cash from your sister, who is a single mother with three kids, two dogs, a mortgage and a car payment. The last thing you want to do is take money that your sister will need in a month when you do not expect to make any money within the next 6 months. Learn what their investing time horizon is and determine whether they can affford to fund your request. Make sure to manage their expectations around the timing of the return of their money, and be very conservative in your estimations here. It is always better to give your investor a return earlier than they expected.
3. CREATE A COMMUNICATION STRATEGY – INVESTOR RELATIONS
This one is critical so you should setup a program for communicating news about the business to your investors. This is especially important if you have a sizeable group of investors who are close to you. You do not want to spend all of your time managing investors’ expectations so create an investor relations website or newsletter. This does not have to be anything more than setting up a private Wordpress blog – where investors can login and get news on the business and request information etc.
I want to hear your stories. Have you ever invested in a family member or friend’s business? Was/Is the business successful? Have you ever raised money from your friends and family? From either side, what would you have done differently? What did you do right?
Photo Credit: borman818
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