How to ask family and friends to fund your startup?In other words, what’s the right and best way to ask your family and friends to help with funding your startup?
Businesses run on money. Finances are even more important for smaller new ventures. Having your friends and family participate in this can be an important step in growing your company to where you want it to be.
As I share with members of Impakt Tribe, there can be both pros and cons to getting these members of your personal network involved. What are they? How should these events be structured? What is the best way to pitch them and get them involved?
This is to establish the terms and conditions surrounding the deal that is being signed by both parties.
A clear promissory note is important for a smooth financial deal. And in this article, we will be showing you all how to write one.
Startups need capital. It takes money to start, operate and grow a business. While there are smart ways to start and stay lean, it can often take more than you think. Even more, if you want to go big, last and make a difference.
It is also vital to remember that the number one reason that businesses fail is running out of money. In fact, most of the common reasons that companies fail and go out of business can all be directly traced back to not having enough cash.
No matter how inexpensively and leanly you think you can do this, it is wise to bring in some money, and have a cushion to ensure your survival and ability to thrive.
Startup Fundraising Rounds
Startups don’t just get funded once and are all set. In fact, once you start getting funded, you are just initiating a new ongoing process that will last for the lifetime of your company. At least through your exit and tenure with the business.
Funding comes in rounds. Which typically follows these stages.
1. Pre-Seed Round
This is the first money the company puts in the bank. This round can still be a little murky, with multiple potential participants.
Often the friends and family round is the pre-seed round. Though it may come before an official pre-seed round, with more sophisticated outside angel investors participating in a more formal preseed. A round that will bridge the gap between friends and family, and a larger seed round.
However, the preseed may also come from founders themselves. If you have a sizable amount of funds that you can invest yourself, then you may begin with self-funding. Though there are advantages to bringing others along for the journey, even if you don’t need the money. So, how to ask your family and friends to fund your startup?
2. Seed Round
This is often the first serious round of funding that startups bring in from outside investors. Seed rounds have been getting larger, and have seen more sophisticated investors and institutions participating in them.
This is a strong amount of capital to really get the business going. Often used to finish developing the product, furthering testing, rolling out the go-to-market plan, and really proving it has the legs to be a successful venture.
3. Series A Round
This round of funding comes in when there is already some foundation for a business. It may not be profitable yet. Sales and revenues may be modest. Though, this round of financing can really help unleash its potential and nail product market fit.
4. Series B Round
Unit economics, the business model, and systems should be working well by now. This round of capital is typically about expanding. It may be building out more infrastructure and hiring, or moving into new areas and niches. As well as to improve efficiency.
5. Series C Rounds
Series C and later rounds are mostly about scaling. This can be by multiplying current successes, international expansion, or acquiring other parts of the supply chain and customers. Some of these rounds may be bridges to an exit.
What Is A Friends And Family Round?
A friends and family round of funding is the earliest startup capital your company will bring in. It may or may not be named as your pre-seed round.
This is usually a more informal round. Though the more professionally is it structured, the better, and easier future rounds will go.
This round is all about your personal network. It may include close immediate family, extended family and relatives, as well as friends. They may be childhood friends, former classmates, previous coworkers, or bosses and professors. They can also be people you are introduced to through these personal contacts.
Don’t dismiss this round because you don’t believe your friends and family aren’t rich. They don’t each have to contribute a lot of money. Sometimes it is the principal and side benefits which are more valuable than the actual amount of capital raised. So, figure out how to ask your family and friends to fund your startup.
What’s So Important About A F&F Round?
Do not underestimate the value and importance of raising a friends and family round. You can’t exactly go back and raise one after you fail to hit your Series A or B.
It’s The First Stepping Stone
This round is your first stepping stone to build your business idea and obtaining more capital from other investors.
It is one of the best signs of credibility for future investors. When it comes to funding for early-stage startups, the decision mostly comes down to believing in the founding entrepreneurs.
If those who know you best aren’t willing to bet on you and invest in you, that may be a red flag for other investors. The opposite is also true.
Proves Your Ability To Sell
For a startup business idea to succeed the founders and key team members must be able to sell. They must be able to sell the product, idea, company, and vision. If you can’t sell this group, how are you going to sell anyone else? Success in this round is a positive for future investors.
The Benefits Of F&F Funding Rounds
There are many advantages of starting with a friends and family round for financing your startup.
In addition to credibility and the benefits already mentioned, these include the following.
There are many ways to structure these rounds. Though done well it can be a form of non-dilutive funding. Meaning that you can preserve more equity for recruiting professional advisors, key team members, and other cofounders, and raising sophisticated capital in the future.
Faster & Easier
This can be the fastest and easiest money to raise for your startup.
While it is also a great opportunity to hone your professional pitching and presentation skills, close connections aren’t likely to be nearly as tough as professional investors.
This can help you avoid lengthy detours and distractions, preserve your edge in the market, and get to make moves faster.
Hopefully, it also means much better financing terms than if you went to a bank or VC firm. As well as more slack should you run into issues.
Strength For Future Funding Rounds
By raising this money you can go longer without bringing in outside capital. This is the chance to establish and prove your idea, and develop the assets and metrics that will make you more attractive to other investors.
In turn, you’ll be negotiating from a position of strength, and will have more power in dictating the terms you want, from the investors you really want for your Seed and Series A rounds. This is why you should work out how to ask your family and friends to fund your startup.
The Cons Of F&F Rounds
There can be potential risks and downsides to these rounds, just like any other. It really comes down to who you allow in, and how you structure it, communicate, set expectations and boundaries, and protect yourself and your business from risks.
Your relationships with friends and family are probably more valuable to you than any amount of money, or a job or company. Be sure to set expectations well, and not take money that could cost you these relationships.
Separating Work & Personal Time
Startups can be consuming. Now that you may be working on this from home, it is easy to end up working 14 hours a day, 7 days a week. Even if you work half of that, you can end up not truly being present with your family at home. Or all of your get-togethers and dinners and holidays end up being business instead of quality time and a break. Set clear boundaries.
Be careful how you structure these rounds. How much, if any control do you want to give up to these investors? If their vision or situation changes they could hamper your product and vision plans. Or even make it difficult to bring in more investors or sell your business in the future.
You also want to be careful about preserving stock and equity. Especially for institutional investors in bigger rounds, and forming employee stock pools.
How To Ask Your Family And Friends To Fund Your Startup
What are the steps and best practices for recruiting your personal network to help fund your startup?
Develop Your Idea
Make sure you have real clarity on your idea and vision. Especially, when soliciting financing from this group you want to be sure you are truly committed. It should be something which you are sure you can commit to for the next 10 years at least. No matter how hard it is, and what sacrifices you have to make to return their investment.
Understand Your Funding Need
Know how much money you need to raise in this round to make it viable. How much will it take to get through to the next milestones?
It is better to ask for more to make it all the way to the next round than to run out of money and lose their investment.
Also, understand what you can afford to give up for this money.
Understand Their Motivation
What are their triggers and motivations to invest in this with you?
Is it just to help you because they like and love you? Are they also passionate about the mission you are on and its potential impact? Or are they just investing for the financial return, or do not want to miss out on the opportunity?
This will all help you get everything else right when you make your ask.
Create Your First Pitch Deck
Would you like some detailed information on how to create an effective pitch deck?
Now it is time to get to work putting all of this together in your first pitch deck.
At this stage, you only need around 8-12 slides. Use this process to get more clarity on your business.
You can utilize our pitch deck templates to speed things up, we will share this template in our masterclass next month.
Startup Talking & Pitching
Start talking to your friends, family and other contacts. Begin sharing your ideas. This can be happening well before you have your pitch deck polished and are ready to bank the money.
Build up to it. Then go through an actual pitch with them. Practice first. Though pitching in this round will definitely help you improve ahead of pitching to professional investors as well.
We have so much more to share with you and also how to automate the process to collect the right information to build your very first Pitch deck to present to your Friends and Family, please join our FREE MASTERCLASS on June 2th 2022.
You can read more about it via this link.
Please let me know in the comment box below which of these tips you are going to use to riase your very first funidng with Friends & Family round.
Thank you in advance for sharing your thoughts.
Your biggest fan,
Jeroen van der Heide Co-founder & Ecopreneur
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