By Stephen Day
Startup founders all need initial funding. In this first article on fundraising, we will start just with the Friends and Family as a funding group. On later articles, we will explore government grants, SBA loans, as well as equity and debt financing through Reg D offerings to accredited investors.
Getting Ready for Funding
Wait! Before you seek out investment, make sure you have done your homework. Otherwise, you will look naïve and will not be taken seriously. Let us assume that your startup brings value to a particular market. Hopefully, you have done significant market research by interviewing people from these key groups:
Potential manufacturers and/or distributors
If you have really invested the time and energy to seek the advice from the list above, you likely have modified your business projections and goals. At least, you should have. DO NOT BE AFRAID to amend the plan. A good founder will pivot to make the business viable, even when it goes against your original premise.
So, your business idea has been refined, a company registered as an LLC, C or S Corporation and you are ready to start. But, you need funds!
Seeking Unbiased Advice
Prior to reaching out to your friends and family, develop a brief business plan, and find a seasoned advisor. We recommend that you also engage a CPA and attorney who have startup experience. Have them review the business plan before you go to anyone else. Then talk to local bankers about how they can help. Understand that banks will not help much at all with direct investment as you are considered a startup until at least three years of producing revenues.
However, they might have other financing assistance available, including accounts receivable or inventory financing. They may also have clients who might be your potential customers, suppliers or even investors.
Now, if you are ready to seek out friends and family as your potential first investors, consider this carefully. What you do, what you promise, and what you deliver will greatly impact the relationship you have with your family and your friends. Once that trust is erased, it is very hard to win it back.
What you do, what you promise, and what you deliver will greatly impact the relationship you have with your family and your friends. Once that trust is erased, it is very hard to win it back.
Approaching Your Friends and Family
Offer your friends and family a complete investment deal, just as you would to any outside investor. If your grandmother wants to help you with some of her savings, insist that she reads (and signs) all the pages of the investment offering. If there is one, ask your grandmother’s attorney to review the documents and deal.
Your family and friends will help if they have the financial means and they trust you. But, prove to them that you are worthy of their trust and investment by doing your homework. Prepare your documents and business plan and be ready to defend your assumptions.
More than anything, if your family and friends turn you down, DO NOT TAKE IT PERSONALLY.
More than anything, if your family and friends turn you down, DO NOT TAKE IT PERSONALLY. Every founder goes through at least one hundred investors before one will commit. Learn, adjust and keep talking to investors. Treat your friends and family with the same respect that any other investor would have received.