Hi, everybody and welcome to today’s podcast. The topic for today has something to do with how to raise money for your startup. So, I’m going to do a couple of series of these subjects. So today, we are going to focus on how to raise money from friends and family to start your business. Before I get into the main topic, I want to clear up some misconceptions about how companies are funded. When you read the business applications or Entrepreneur, Inc Magazine, Fast Company, What Have You, there’s this misconception that all you do is come up with a great idea go to a venture capital firm, pitch your idea, and everybody’s knocking on your door trying to throw money at you to fund your startups. The reality is that only one percent of all startups are funded by venture capitalists. So, people who go out there and raise institutional money there’s only one percent of startups that get that kind of money.
For the other 99 percent of startups, where do they get the money from? Well, there are a variety of sources where the money comes from: there’s friends and family, personal resources which is personal savings, credit cards, 4-1K, other retirement accounts. So that’s number two.
Then there’s these days, people are getting money from crown funding sources, and then you have angel investors who come in typically when you’ve actually going in some traction, but in majority of startups, a large majority of startups are funded by personal resources and borrowing from friends and family. So, the first misconception is that not everybody is getting that institutional money that you see in the news. Very few, that’s actually one percent.
And then, the second misconception is that people think that banks are an option when you want to start a business, and the truth is that banks are not in the business of funding startups. People have this unrealistic interpretation that you can just prepare business plan, put on your suit and then go to a bank and then walk in and then give them your business plan, and then they’ll read it and then they’ll say “oooh, greay idea, here’s a loan for twenty thousand, here’s a loan for a hundred thousand.” Banks don’t do that. Banks are not in the business. They don’t take that kind of risk because that is too risky. They will give you money once you’ve shown some traction and they feel like you have mitigated that risk but initially, they are not interested in putting money in. You can’t blame them. You have to understand that odds against startups when a huge majority of business that have started failed within the first three years. Banks don’t want to be putting their money into those kinds of risk.
The first source I want to address today is what we call the Friends and Family Source. There’s this joke in a lot of business books that three Fs are a major source of funding, which is friends, family, and fools. They say fools put their money into startups because of the odds, they say you’re a fool if you’re going to invest your money into startups because the odds against you are so high. So, that’s why there’s the three Fs, the friends, family and fools. You see that as a joke but there’s a truth to it because if you have to have a certain level of blindness to put your money into a startup because you’re betting against a lot of odds that this is going to work. But, we are entrepreneurs, so our goal is to go against those odds, turn the negative into a positive, our goal is to convince our friends and family that our business idea is worth investing into. That’s what I’m going to talk about today. So I’m going to give you six different tips on how you can go about successfully raising money from your friends and family. So here I go.
TIPS FOR GETTING MONEY FROM YOUR FRIENDS AND FAMILY
- Preparation. You cannot treat your friends and family as friends and family when you’re raising money from them. You have to really take it seriously and prepare. You should treat it like any other if you’re going to an angel investor and the amount of preparation you’re going to put in. You’re going to prepare a deck, you’re going to make sure that you know what you’re talking about, you’ve done your research, your market research, everything. You should put that level of preparation into going to present to a friend or a family when you’re trying to get money from them for your business. So you need to prepare. Preparation is very important.
What you need to prepare:
- You need to make sure that you clearly state your idea, you talk about your market size and why this is a good market opportunity, you should talk about why your business is different, why different from the competition. That should be in your presentation.
- You should talk about how you’re going to make money. How is this business going to make money? That should be in your presentation. And you also talk about why they should invest in this business, what is so special about it, and how are they going to make their money back.
You should address all these issues in your presentation because you want them to feel that you’re treating them and you’re respecting their money that they’re going to put in. So, take it seriously and make sure that you’re prepared to answer their questions about any aspect of your business and you should not take it for granted that they are your friend or your family so they should just give you their money, because it’s their money, and they’re about to put it into something very risky. You have to respect that and give them everything they need from a research perspective to make them feel confident that you know what you’re getting us into and can deliver on your promise to not only turn that business into success, but also return their money. So that’s tip number one.
- Ask. This is one of the few things that took me a long time to get my head around. When you start a business and you naturally tell your friends, you tell your family, and you tell them about your problems and say to them everything. But one of the things we forget to do is to actually ask them for funding. It is different if you’re going to talk to your friends, let’s say “oh, I’m setting up this business, I’m really excited, I have to raise money, I don’t have money. I don’t know where the money is going to come from.” or you tell it to your family but you have to formally ask them.You are not going to get their response that you expect them to but assume that people will actually know that you need money is very naive. You need to actually go. People like to be asked. You should ask.
I have a very vivid example where one of my best friends, who was actually the best man in my wedding, so we’re that close. So when I started my business for a very long time I was doing this friends and family run and one day I was over the phone and we’re talking and I was telling how my business is struggling and I told him that hey I’m trying to raise money and I have very competitive interest rate, would he like to invest or would he like to loan me the money, and he said “YES!”. And I was very surprised because he’s my friend and we kind of share financial problems with each other and I assumed that he may not have the money, or even if he may have it, he may not invest it in my business, and that was a wrong assumption. Within a week, he made me a $30,000 loan which was huge for me at that period of time because I needed the money and I offered him a very attractive interest rate. Within the week, the money was sent to me and I was very surprised, I was pleasantly surprised because I had never asked him for that before, I only just share my problems with him and here he was, ready to help and the only thing I had to do was ask. So you should ask. You’ll be surprised until you do. You’ll never know who’s willing to help you and who’s not. So that’s tip number two.
- Thick skin. You need to have a thick skin when you’re asking friends and family for money. Some of them are going to say no. and when they say no, you should not take it personally because you have to understand, this is their money and you’re asking them to invest it into something risky. Some of them would, some of them wouldn’t. You don’t know their personal situation, you don’t know what they’re dealing with and most of them are probably afraid for you.Why are you doing this? They are not sure whether you have what it takes to do it so there’s some doubt there. It’s for you to prove yourself. When you ask a friend or a family for an investment or loan for your business, and they say no, you should not take it personally. Yes, you’re disappointed, but you should put it in a framework because this is a very risky thing you’re asking them to do. Some of them may not be comfortable, they don’t have that appetite, there’s a reason why they are not in business for themselves. You should be able to take that and move on to the next person. That is a very very very important lesson.
- Offer attractive terms. You don’t just take their money and give them zero interest. I think you should offer a very attractive interest because it’s a risk and for them most part, it’s an unsecured risk. It’s not like your putting security behind that loan or investment. Number one, if you’re asking for a loan, you should mention that you’re finding interest in interest rate that is probably much better than for them to put their money into their savings account because you are compensating them for the risk that they’re about to take which is a much higher risk than putting their money in the savings account or you could just hold it in without investing it. So, offer them a very attractive interest rate and you’d be surprised that people hold on to that. Not only that, is that when you offer an attractive rate, it’s structure would such that they will start getting regular interest payments at some point.Maybe the first year you may not be able to pay interest, but when you start gaining revenue, build that into your financial so that you are paying regular interest rate. And there are a lot of reasons why that is a good idea, but the two most important is that this is a risky business and if I have invested money in your business and you’re giving interest, at least I’m getting something back. In the future, if the business goes under, I’m not coming up short or zero, at least I’ve got some interest back. I’ve got something back during the period that the business was thriving. That’s very important.
Number two, it kind of reassures them that you know that ‘I’ve invested money into your business and I’m getting the return’. That’s a good feeling about that, and it gives them a positive feeling about the investment they’ve made in you because getting that interest check regularly helps them feel good and not nervous for their investment because if you tell them indirectly that the business is making enough money for you to be able to pay them the interest. So that’s very important.
- Keep them in the loop about everything. So, if there’s something that you are not going to be able to do, let’s say, you have an interest payment and a principal payment that you are not going to be able to make, don’t let the terms expire and not say anything. If you see it coming, let them know ahead of time. Call them and explain to them “hey, I know I have to pay you interest next month, there’s something going on with the business so… I would not be able to make that payment. I think I can make it at X day.” or, “I won’t be able to make the principal payment because of this…can you give me three months, or can we extend it into six months?” Get ahead of it. Don’t let it expire and have them call you demanding payment. That reflects badly on you and you can’t get money from people like that anymore.It’s actually not that good way to run things especially when you’re borrowing from friends and family. Get ahead of everything before they call you. If something is not going to be done at the day that you’ve promised, you should make sure that you’re calling them and staying on top of it. That shows your respect for them, for their money, and for their time.
- Provide them periodic updates. If you’ve borrowed money or if they’ve invested money on a company, don’t just take money and just go about your business. Give them periodic updates. You can do that every six months or you can do that every year where you write them a nice letter or a nice email just explaining what has happened. “Hey, this is how the business has done this yea, this is the great things that happened, this is some of the not so good things, and this is how we fixed it…” Make sure that they’re in the loop on how things are going. And of course you want to share the positive news but even if it is not positive, share it with them and then tell them what you’re doing to turn things around. They will respect you for that because that, again, makes them feel that you care about the money that they’re giving you, you appreciate that they’ve invested their money in your business, and you respect them enough to let them know how things are going.Give them periodic updates don’t let them ask you. Just put on schedule and send that email, or send that letter, but take your time and drop the nice letter or nice email and say Hey, it’s six months or is it another year this is how the business did, this are the exciting things that have happened, these are the not so exciting things, and how we’re working through it, thank you for still believing in us and thank you for still investing your money, it means a lot to me and I’m grateful for that, for you for doing that.
So those are the tips on how to raise money from your friends and family to fund your business. So, thank you for watching this podcast and I hope you find value in what we’re talking about today and subscribe to our channels for up and coming podcasts. Thank you.