According to a report distributed by the Angel Capital Education Foundation, total startup funding from venture capital funds, state funds, and angel investors totals approximately $20.8 billion annually.
Surprisingly, friends and family contributed nearly three times the amount of capital to thousands of startups each year.
With approximately $60 billion in startup funding coming from friends and family, entrepreneurs must consider this as an option as they seek to launch new businesses.
Money issues between friends and family can ruin relationships. Due to the risk involved with investing in a startup, if you are requesting investment from friends and family, be sure to consider these five steps before you begin the capital raising process:
- Prepare a pitch. Just because you are requesting investment from your mum or a group of your college buddies doesn’t give you an excuse to be unprofessional. Take this opportunity and the potential risk taken by your investor seriously. Do your homework, and prepare a professional, persuasive and passionate presentation. You want your friends and family to buy into your vision, not just hand over some cash because they feel obligated or pressured.
- Have a game plan. When you are seeking angel investment or venture capital investment, you will need a strong business plan, but do you really need a business plan for your friends and family? Instead, you might consider a vision, strategy, and tactics plan. You will start by developing a vision for the future of your business, then strategies to reach your vision, and finally day-to-day tactics to accomplish your strategies. For example, assume that you have a vision of becoming the leading online retailer of picture frames. One strategy may be to utilise search engine traffic to bring in customers. Finally, you will develop tactics such as building quality links to your website through social media and professional article writing to boost your rankings in the search engines.
- Have an exit strategy. Angel investors and venture capitalists want to know how you intend to grow their investment. They want to know when and how you intend to repay them, with interest. Your friends and family should be no different. Although you want to disclose the fact that investing in a startup is risky, you should also outline a detailed strategy for the investor to exit profitably. Maybe you will structure the capital as a high interest loan, or maybe they will own a percentage of the business and be repaid through the profits. No matter the structure, you should have a detailed plan for repayment.
- Consider making it official. Depending on the size of the investment you may consider hiring a lawyer to file the necessary paperwork to make everything official. Obviously this will give the investor peace of mind, and it should help you in the future as you seek angel investment. Making it official gives you credibility for future rounds of investment. Remember to use judgment though, if your buddy is going to invest $10,000, and the legal fees amount to $2,500, you may want to resort to a firm handshake.
- Follow through. Again, investing in a startup is risky, and your friends and family probably know that, but they should expect to earn a return on their investment. Don’t view this capital as a gift, instead follow through with what you promised. If things don’t go exactly as planned, be sure to communicate regularly so that they know what to expect. If at all possible, follow through. If you fail to deliver as promised you risk your entire relationship and your ability to raise capital in the future.
As you seek capital for your startup don’t neglect the $60 billion opportunity represented by friends and family, but tread carefully as you risk something far greater than the failure of your business–your relationships.
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