Most entrepreneurs have learned that it’s almost always quicker and easier to get cash from someone you know, rather than angel investors or professional investors (VCs). In fact, most investors “require” that you already have some investment from friends and family before they will even step up to the plate.
You see, investors invest in people, before they invest in ideas or products. Since they don’t know you (yet), their first integrity check on you as a person is whether your friends and family believe in you strongly enough to give you seed money for your new idea. If they won’t do it, they why would I as stranger invest in you?
Friends and family will likely not expect the same level of sophistication on the business model and financials as a professional investor, but they do expect to see certain things. Here is a summary of some key items to think about as an entrepreneur before approaching friends, family, or even fools:
Nothing kills everyone's optimism and desire to help quicker than a negative or arrogant attitude.
If they are going to put cash into your company, chances are that they will expect to spend a fair amount of time together, either helping you or certainly discussing progress. Nobody likes a downer.
Saying that you need money to start is not nearly as convincing as saying that you have built a prototype on your own dime, but need more to roll it out.
We all know people who can talk a good game, but never get around to building anything.
Be honest with naïve family members and friends about the inherent risks of a startup -- at least 70% fail in the first five years.
Don't take money from family or friends who can't afford to lose it. Think hard about the consequences of a possible startup failure and the loss of their funding.
Having a real project, rather than just an idea, is a strong positive when networking for angels or VCs. Now you really have something to discuss, and real credibility as an entrepreneur.
Build the relationship first, ask for advice on a real project, then maybe money later.
Overall, don't think of friends and family funding only as a last resort. There are massive advantages, like sharing profits with friends and family, as well as the strategic credibility than can be gained from funding from someone you know, rather than from a professional investor.
I hope all of these points seem like common sense to you, and you wouldn't think of handling it any other way. Yet, I'm continually amazed at how often I am approached as a professional investor by strangers asking for a million dollars to fund an idea, without hitting even one of the above points.
We can all recount horror stories of families and friendships torn apart by money lost on someone else's speculative dream. In these cases both the entrepreneur and the funding partner are the fools. Don't be one.
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