|Posted on September 12, 2018 at 1:40 PM|
Entrepreneurs face a number of challenges when starting a business, no matter how passionate they are about their new idea. Whether we like it or not, money plays a huge role in the start-up world.
Money can come from a variety of places: bank loans, angel investors, crowdfunding, personal funds, etc. In this post, we’ll focus on one of the most common sources of start-up funding: family and friends.
When you’re looking for that first tier of investors, getting banks or independent investors to risk money on you is hard, so your best chance to get your business off the ground is securing money from your friends and family.
Of course, ultimately you’ll need more money to be able to scale your business, but that first contribution from the people closest to you is often a must to get professional investors to consider investing in you or your business.
The logic is simple, if your friends and family won’t invest in you, why should they?
When approaching friends or family, it is more about selling yourself than the product/service you’re offering: they will likely base their decision on trust. Be honest about the risks, let them know what the money is going towards, and set yourself up for mutual expectations down the road. Here are some tips that will help you be seen as the right person to invest in:
1. Be the first one to invest
This sounds a little bit obvious, but if people don’t see you risk anything then why should they consider investing in you? Your investment and commitment to your idea will not only give you credibility, but it will show leadership as well.
2. Present a formal business plan and agreement
This shows respect and professionalism, you probably won’t need to present charts and a lot of materials, but do let them know you’re not asking for donations or charity. Whatever the payback method is, make sure the terms are fair for both parties.
3. Communicate your plan as well as the risks
As mentioned above, investments are not gifts, so you need to be clear about your plans for their money. The truth is more than 50% of start-ups fail, so make sure they are aware of the risks to avoid problems is the future.
4. Ask for specific amounts to reach a milestone
Your business plan must have objectives, so that you can present different milestones to your potential investors. Do your homework; having a target will definitely make a difference in their minds, plus it will show how much confidence you have on your business.
Friends and family are often seen as the last funding resort, but they’re actually a great resource. Of course, you have to make sure you do it the right way. The tips above will get you started, however sometimes bringing in a professional to liaise with all parties will provide a further sense of comfort for all.
Managing Consultant | AngelytiX Consulting