When a company is just starting out, it can be very hard to get investors. Because of this, some founders choose to ask friends and family for pre-seed funding. In a “friends and family” round of funding, founders look for money from people they know.
Because the company has almost no performance reports or revenue streams, this round of funding is much less formal than rounds with professional investors.
Also, the return on investment is usually lower in a round of funding with friends and family than in a round with professional investors.
The low returns and terms on investments may be due to the personal reasons why friends and family invest: Your friends and family want you to do well, and they are usually more interested in helping you reach your goals than in making a big profit like an investor would.
Tips for Raising a Friends and Family Round of Funding
Consider Your Company’s Valuation
Due to the lack of or unreliability of a revenue stream, it can be hard to put a realistic value on a pre-seed company.
The best way to figure out how much a pre-seed company is worth is to compare it to an existing company, either on your own or with the help of an outside agency.
Even though the comparison isn’t perfect, it will give you a place to start. A friends and family round of funding is informal, which means that most of the people in your personal network probably don’t care about how much your business is worth.
But they do want to see that you are serious about your business idea and willing to put in the work.
Create a Detailed Business Plan
Investors are interested in how a company works, no matter who they are. Putting together a detailed business plan is a useful step that goes beyond getting funding.
First, decide how long the plan will be. The plan is less accurate the further into the future it looks.
Think about what the next six months will look like, and if you’re not sure, be conservative with your expenses and income.
It’s always better to undersell an idea to investors, especially if they are people you care about, like friends and family.
Understand the Different Types of Funding
Your personal network can invest in your business in three ways:
- Loans: This investment will be paid back over time, and interest may be added.
- Gifts: This is an investment that doesn’t have to be paid back, and the person who gives it doesn’t get anything in return.
- Equity: When someone invests money in a business, they get a piece of the business in return. This makes them a business partner.
Write and Communicate the Terms and Repayment Plans
Once you and your friends and family have decided on a type of investment, make sure that all the details are clear.
Talk about how loans will be paid back and the interest rates. Make term sheets for equity investments and formal agreements for gifts.
Keeping track of and talking about the details of an investment is good for both parties. A founder needs to keep track of fundraising to keep from diluting the company too much.
Investors also need to know and write down the risks they are taking. If you want to avoid mistakes and arguments in the future, you might want to talk to a lawyer who specializes in business or startups.
Pitch to Trusted Loved Ones
Practice helps you get better. You probably won’t get all of your pre-seed funding from just one friend or family member. Instead, you’ll have to pitch your business plan to a lot of people in your personal network.
You might want to start with your close family or the people who are most likely to want to invest in your business. One more good thing about pitching to family first is that mistakes will be easy to forget.
Next, talk to people you know well. This group could be made up of friends from childhood, old classmates, old coworkers, and mentors. The best way to make this list is to look through the contacts on your phone.
Last, talk to people you work with and friends of friends. Most likely, these people will have the least reason to invest in your business, but at this point, your investment pitch should be as good as it can be.
Also Read:
Comments are closed.