How to raise a friends and family financing round? If you’re in need of a cash injection for a new or existing business, reaching out to family and friends could be the perfect option.
Many people prefer acquiring capital through this method, as it is often easier to speak freely to your closest connections.
In this article, we take a look into this method of fundraising, including the benefits, drawbacks, and how to properly gain investment from them.
The Ultimate Guide To Pitch Decks
Weighing The Pros And Cons
Before diving into securing an investment from friends and family, you should first decide whether or not it is the right route for your business.
So let’s start with some of the advantages associated with this type of crowdfunding:
- Favored Investments: Fundraising using this method is often the most popular due to the favorable terms you can receive. You can often negotiate easier with friends and family, as their main priority is to offer you help moving forward. They are usually not investors by profession and won’t be looking to just make money from your venture long term.
- Less Risk: Some more corporate investment companies may ask you to put up collateral when taking on a loan. This could include things such as your home or vehicle. It is highly unlikely that your friends and family will ask for the same, giving you an added sense of security should the business fail.
- Comfortable Pitching: As mentioned previously, you can often pitch to your friends and family easier, especially when opposed to an investment company. This will allow you to speak clearer and provide better information to potential investors.
- Shared Interest: When someone offers financial support to a company, it goes without saying that they will want the business to succeed. This creates a shared interest between you and investors. Chances are, they will offer more than an injection of cash and will always be looking to provide advice for growing the business and promote you to others.
- Overall Speed: Most members of this circle that are willing to invest will have the cash ready immediately. This means you can gain access to the funds without having to wait for long periods of time, allowing you to get on with developing the business further.
Now that we’ve established the advantages of receiving an investment from friends and family, it’s only fair we take a look at the potential disadvantages too:
- Potential Disruption With Relationships: You’ve surely heard of the saying ‘Don’t mix business with pleasure.’ When money is involved, situations can become heated easily, which can damage the relationship you share with an investor.
- Critical Comments: Sometimes, investors feel the need to spur you on in order to recoup their investment as fast as possible. Family and friends feel comfortable around you, meaning that they will always tell you exactly what is on their minds. If they don’t feel like you are working hard enough; these comments can certainly lessen your motivation for success.
- Overcommitment: Before you take money from a friend or family member, it’s important to understand their financial situation. Some may be willing to invest more than they can realistically lose, which should be a huge red flag. Make it clear that not ALL investments are as safe as they seem. They should have enough money to live comfortably, even after they have invested, and if you can’t pay them back.
Weighing up the above points should help you to determine whether or not a friends and family financing round is the correct starting point for your company.
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Have A Professional Pitch Ready To Go
Impressing your potential investors with an exceptional pitch is a sure-fire way of increasing their confidence within your business.
Plan and execute your pitch to the highest levels possible. You should also try a few rehearsals before reaching out for financial support.
Your pitch should grab the attention of your audience immediately. Perhaps by using an impactful first line regarding the opportunity you are providing.
From there, be clear about exactly what you are looking for. The main chunk of the pitch should obviously include relevant information about the business, including the product/service.
Having a prototype to show is a great move too. Mention expansion plans, and targets that you are looking to fulfill. Keep it fairly short but be careful not to miss out on any important details.
After the initial pitch, allow questions to be asked on anything the investors, or you, might have missed.
And, if you have more questions about how to send a pitch deck to family and friends, I have some great tips you can use. Check out this video fo more information.
Cover Every Possible Question
When you’re applying for any type of investment, it’s important to know your business or project inside and out.
Just because you’re talking to friends and family doesn’t mean you shouldn’t be able to answer any questions they have without hesitation.
While you may know the fundamentals of your business already, it’s worth spending some time memorizing other elements of your model, including:
- Cash flow for the next 3-5 years: You should know earnings, outgoings, and total profit expectations for these periods.
- Acquiring a Patent: Having a patent essentially stops other companies from stealing your idea. Consider applying for one for your product if possible, or know what stage your patent application is in when pitching.
- Other investments: If you plan to reach out for more investments in your business, specify where this will be coming from (and at what potential cost).
- Competitor analysis: You should also know about the competition within your market. Mention how you plan to compete and in which areas you will have an advantage. ∙
- Expansion plans: How will you expand your business in the future? What will be the costs of intended expansions? Think of new staff, building changes, and the cost of other operations.
If you can answer all the above questions, then chances are that you’re ready to go!
Decide On The Type Of Investment
There are two main types of investments that you can look for when reaching out to friends and family.
The true difference comes with what you give in return, which is typically a repayment or equity within the company.
Repayment investments, or loans, are where the initial amount of capital is returned to the investor after a set period of time.
When crowdfunding from friends and family, they are likely to not want interest (or much interest) on the sum they initially invested.
This type of fundraising is perfect for getting a quick injection of cash in order to start your business without giving away ownership and control.
Nor will you handle the pressure of high-rate debt and fixed installment payments. When working out how to raise a friends and family financing round, repayment investments could be a great option.
In exchange for their initial capital, investors get a percentage of your business and may eventually generate revenue on a regular basis.
For example, if you part with 10% equity within your company and profit $10,000 monthly, then $1,000 of this would go to the shareholder.
The best part about this type of funding is that you will only part with large sums of money if your business succeeds.
You are also likely to receive more input from investors along the way. Whether this is further monetary help or advice on future plans, introductions, and promotion.
Make sure you strategically part with equity in your business and calculate the potential returns when reaching out for investments.
You want to make sure the amount shareholders receive is fair. Not too much and not too little. It’s important to remember that you will need to retain over 50% of your business if you want to remain in control.
Outline The Expected Returns
Setting realistic repayment terms is key for allowing investors to plan their returns.
When calculating the amount of profit your business will be making, decide how much per month you will be allocating towards repaying those who financially supported you in the beginning.
Doing everything in your power to stick to this payment schedule will give your investors peace of mind. That will further help to reduce the chance of a hostile situation.
Keep this factor in mind when working out how to raise a friends and family financing round.
Picking The Right Investors
Reaching out to all of your family and friends for an investment is not always the best approach.
Some may not be knowledgeable about your business model, meaning all they can contribute is their funds.
If possible, only approach people that are savvy and have a good understanding of business or your chosen sector in particular.
Here are some steps you could take when selecting potential investors:
- Check Their History – See if they’ve had any investments in the past and if so, analyze their contribution. Did they sit back and collect their returns, or were they actively involved with the business at every opportunity?
- Survey Their Interests – You could ask a group of people if they have wanted to invest in a business previously. People who are interested in providing financial support will often go the extra mile in order to support your plans.
- Connections – If a potential investor has connections that could be useful for your business, they should be your preferred choice. They might know key leaders within your industry, or simply be in touch with other people looking to help you out.
- Your Relationship – Having someone you can get along with is also an important factor in determining whether or not you should work together. Look for qualities such as being a good listener, being happy to give advice, and never being afraid to tell the truth.
Don’t Limit Your Investment Potential
The friends and family round of your financing plan could be used as part of a larger plan. Investment doesn’t have to solely come from these sources.
You always have the opportunity to apply to different places in order to raise the required amount of capital.
After asking friends and family, you could also consider getting in touch with angel investors or venture capitalists.
Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Tips For Improving The Efficiency Of Friends And Family Financing
If you’ve decided that raising funds with a friends and family round is the first step to gaining investments, it’s important to ensure that you’re getting the best deal. The tips below might help to increase the efficiency of the process:
Agree On Favourable Terms
The biggest advantage when fundraising with friends and family is the potential to negotiate good terms.
Use this as much as you possibly can and remember that the main reason for their investment is often to help you get started.
If you’re looking for a loan, see if you can get one with zero interest. With equity-based investments, seek to add a buy-back clause if possible.
Don’t Let Up
Treat this investment opportunity the same way you would approach a bank or any other organization.
Be professional and disclose all information available to you. Just because they’re your friends and family, doesn’t mean they don’t require some persuasion in order to invest.
Plan, prepare and answer any questions they might bring up. Even when you’re trying to raise a friends and family financing round, prepare a detailed pitch.
Just as you would for a venture capitalist.
Keep Them In The Loop
If you are still in the early stages of creating your business, be sure to tell people about it before its launch.
You could bring up the idea long before seeking the actual investment, which could keep your closest friends interested in your new venture.
By showing that you are looking for investors also might pique their interests, leading them to inquire about helping without you needing to ask directly.
As you are likely to see these investors on a regular basis, you should fill them in on your progress.
Send them any news you have regarding the business and just generally keep them updated on how things are going.
This will give them confidence and opens the door for fresh ideas, advice, or even a repeat investment in the future if required.
That concludes our article on how to raise a friends and family financing round. Remember to keep a professional attitude when reaching out, even if it is not expected.
These people will want to help you in any way possible, so don’t be afraid of asking along the way.
If you can find investors that are both knowledgeable and ready to offer financial support, consider these people to be the main priority when pitching.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.