Closing a family and friends round seems like it shouldn’t be that hard.You’re presenting to a room full of people who love you, asking them for cash.
But it’s actually pretty tricky.
Speaking to people close to you about a business idea is incredibly nerve-wracking. After all, if the company tanks you’re letting down loved ones, not loaded investors who know what’s at stake.
Getting family and friends to invest in you is more challenging than you’d think, and like any other pitch, you’ll receive far more rejection than support.
But it’s worth going for – family and friends actually invest 3x more money than traditional venture capitalists; $60 billion versus $21 billion.
We spoke with three entrepreneurs to find that fine line between casual and professional pitching that will make people close to you whip out their check books.
The big worry: what happens if the company tanks and you lose their money?
'If we failed,' says Andrukonis, 'It would definitely be embarrassing and awful-- one of the worst moments of our lives.'
The fear of failing and having to tell friends that their money is gone motivates Andrukonis and his partner to no end.
Another founder, Alexa Von Toble of women's finance site LearnVest.com, never even considered family and friends funding for her seed round.
'When you climb Mount Everest,' she says, 'you want to be guided by Sherpas. You want a bunch of people around who are pros-- they've done this before and can give you advice. For LearnVest, I wanted to surround myself with entrepreneurs and VCs who had worked with successful startups. My family and friends are very supportive, but they've never tried to run a women's finance site.'
Andrukonis pitched all of his prospects in their homes after asking for meetings over the phone.
'When you call and say, 'I have an exciting idea to create a new company,' people respond favourably,' he says.
Inc.com writes, 'Making the business pitch to friends or relatives shouldn't involve a surprise conversation. The person should have notice that there is going to be a serious talk.'
Wayne Rivers, president of Family Business Institute Inc. tells Inc.com, 'This should be win-win and business-like in nature,' Rivers says. 'It shouldn't be because Grandma feels guilty that you didn't get a birthday present when you were 14.'
Family members have insight that can prevent entrepreneurs from wasting time on unlikely candidates.
Andrukonis' parents were among his first investors, and were encouraged to see others supporting their son's business.
'Once they saw that people were excited about investing in our business, they made some helpful suggestions about who else to contact,' says Andrukonis. 'But it's important to keep in mind that no matter how much someone likes you, they aren't going to invest in your business if they don't think that you're going to make them money.'
Leahy discusses how he selected his targets: 'Unless you don't need much funding (or you have very deep pocketed immediate family members), you're going to end up pitching some people you've known all your life and some people who might be friends of friends, co-workers or others who were drawn to your business concept.'
Rehearsing your pitch beforehand is a good idea. 'It's certainly important to show that you've done your homework,' says Leahy.
'We probably weren't as polished as we should have been,' Andrukonis recalls. 'My partner and I stepped on each others' toes a lot. But we wrote a business plan which helped us speak with confidence.'
Like anything else, practice makes perfect, and by the end of their 30+ pitches, Andrukonis and his partner had a routine down.
Andrukonis opened his pitch by saying, 'We have an opportunity we're really excited about. Feel free to interrupt with any questions.' His pitch included:
- The idea
- Customers/Who they would be selling to
- Why the company would work
- What they would do with the money
- How much it would cost the investor
- How many shares that money would buy the investor
The meeting usually ended with final questions and a request for time to mull it over.
Leahy warns, 'Getting dressed up and bringing a laminated pitch book is probably overkill.'
While you want to appear professional, it's more important to appear knowledgeable and passionate about your business aspirations.
'More than anything, especially if you're pre-product, it's important to show that you're attacking a big problem/big potential market, that you're passionate about what you're doing, and that your proposed solution is at least plausible,' says Leahy.
'A printed out business plan and a suit isn't going to do you any good if you can't convey these points, and it hardly matters whether this is presented over a formal business lunch or after a few beers on Thanksgiving day,' he insists.
It's important to make sure potential investors know exactly where their money will be going.
One idea Andrukonis and his co-founder had was to put all the money they raised in a separate account for what they called an 'impoundment period.'
They kept all of the money together. Had they not reached their goal of $115K, they would have given back all of the money they had raised.
'The impoundment period gave people comfort,' Andrukonis says. 'It assured them their money wouldn't be spent alone.'
Most people need time to think it over, and you should give it to them.
A physical leave behind is great, says Andrukonis, and a thank you email the same night is also appropriate.
'There's no real magic timing when it comes to following up,' says Andukonis, who both initiated and received follow-ups from pitches.
When waiting for a response, don't be afraid to be persistent.
And don't let anyone 'give you the hint.'
'I'm never going to feel bad about hounding someone for an answer if they haven't responded,' Andrukonis says emphatically.
'People know English. I wasn't going to let anyone give us the hint, although some people tried to. They needed to give us a definitive answer.'
Andrukonis believes if you're not irritating the most irritable people, then you're not doing it right.
One couple who invested in a friend's child's startup shared why they invested.
'I liked their idea, their preparedness and their pitch. We knew the parents, but that had nothing to do with the decision to invest.
'The entrepreneurs came to the house dressed in jackets and ties, and armed with a full, professionally prepared business plan. They explained their idea and answered all our questions clearly and honestly. I thought their idea made sense and could work.
'It was obvious they had thought about this carefully and had a good plan. They were confident. I asked them about existing competition and barriers to new entrants. I asked them how they planned to get the technical work done. I asked them how far they thought their initial round of financing would take them. I asked if they were going to quit their jobs to work on this full time.
'They were ready for every question. I was impressed. This was not the kind of investment we would normally make, but they were committed and I wanted to see them get their chance.'
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