…A huge mistake is raising money from people who cannot afford to lose it.
I’ve raised money from friends and family twice, and want to share what I’ve learned so that you can raise money from your friends and family and still be able to attend your family reunions. I must say raising money from friends and family can be easier and less complicated than raising money from professional investors, but is not without drawbacks.
There are certainly pros and cons to raising money from family and friends hence I would like to share my experiences, and address a few questions I’m often asked about raising money. The 3 main questions people ask me concerning money are:
1. How am I able to raise money quickly?
2. How to approach family and friends about investing in a business?
3. What are some advantages to raising money from friends and family instead of angels?
Please understand my money experience may differ from yours. So below are a few things I feel are… important benchmarks when it comes to raising money:
1. Be Prepared. I was able to raise money quickly because I wrote a detailed business plan. I used my preparation and research to get my friends and family to believe in me. Before I asked for anything, I wrote a two-page executive summary of my business that included how much money I was trying to raise, my valuation, how much they would need to invest to own one-percent of the company, why I needed the money and what I planned to do with the money when they invested. This exercise helped me really key in on how to explain my idea and plans to my family and friends in clear, non-jargony language.
2. Seek Accredited Investors. All of my investors had net worth of at least $1m or a yearly salary of over $300k. Accredited investors helped me in two ways. Since they were high net-worth individuals, they could afford to lose their entire investment if I did not succeed, which helped me avoid the mistake of raising money from people who cannot afford to lose it. Having accredited investors meant less paperwork for me and my legal team because of laws that allow people with higher net worth to invest with fewer requirements.
3. Put Your Cards on the Table. I was up front with my potential investors. While I was confident I was going to be successful, I told the investors that the worst case scenario involved the possibility of them losing 100-percent of their investment. I told them that they might not see a return on their investment for five or more years. And my investors were comforted by knowing that I were being honest with them about all of the risks.
4. Don’t Drink to Much From One Source. In my first company, our biggest chunk from one single investor was $70,000. While we ultimately made him money and he could have afforded to lose his investment, it would have been more comfortable for everyone involved to have gotten a little less from one single source. It’s also not the end of the world if one of your potential investors turns you down.
*Learn learned: Don’t press for money from someone who is uncertain because they will be the first to complain when things are not going as well as you had hoped.
A family and friends round can also set you up nicely for a second round from an angel or VC if it is necessary down the road. If you can show that your family and friends believe in you, and you’ve hit the milestones you’ve promised, it gives you credibility. You don’t want some angels watching your pitch thinking, “This guy couldn’t even get his Mom to believe in him, so why should I?”
I encourage you to think about friends and family as a viable way to get your first round of funding.
As usual if you think I plagiarized some of this material more than likely I have and if you see something that’s yours let me know so I can remove it. Cool Beans