By James Murray
Most young entrepreneurs report lack of funds as the biggest hurdle they face in the early days. Though they foresee astronomical growth and soaring profits, and prepare for entrepreneurial success, they find it hard to find investors in the initial stage. Raising funds to start a business is never easy, especially when the product, revenue stream, financial specifics and business model are all in their nascent or hypothetical stage. So what does a bright young to-be entrepreneur do?
Many entrepreneurs recommend the best way to go about is to bootstrap your venture completely. But also keep in mind that friends and family are often the first investors in many businesses. Accessing funds from family is without doubt the easiest method with none of the cut-throat interest rates, and terms and conditions that usually accompany other options. But you should also prevent it from souring ties with your near and dear ones, should your business fail in future. Here are a few tips to help you.
1. Pitch in All Earnestness
Even though you are speaking to your family and friends, it is always best to approach your friendliest investors in all seriousness. Pitching to near and dear ones requires you to be prepared to present your business plan in the simplest, most lucid and straightforward manner as possible. You should draw up a business plan in about 5 to 10 pages that will include all the important points about your venture.
You should include growth and profit forecasts, and explain why you chose the particular business niche. Your relatives and friends do not want a formal presentation, but they definitely want to see eye to eye with you, and sense credibility, trust and confidence in your words. They are basically investing in you and your ideas, so ensure that you have their best interests at heart.
Remember to summarize challenges, risks and competition your business will face. This will give them a realistic picture about where they are investing their hard-earned money.
2. Understand Your Investors’ Motivations
The driving motivation for your earliest investors can be very varied ranging from love and concern for you, altruism and gratefulness to financial gain or even greed.Whatever the reason for your friends and family hearing you out and lending a helping hand, make sure that you are aware of the driving factors.
Many a time a family member or a friend may expect nothing in return for their investment. They will even accept the fact that you may not be able to pay them back at all. The money you get is virtually a gift from them. This may sound too good to be true, but keep in mind that since you are not promising potential returns you might not get generous amounts of money.
In a few instances when you are met with impressive success, some of your well-wishers may want their money back, often with interest, or they may want equity. It is best that you avoid such a situation in future and prevent things from turning ugly. Try to get everything in writing. A signed document or even a letter stating that the money is a gift will protect you in future.
3. Consider Borrowing
Loans are the best way to go about accessing funds from those near and dear to you. Loans give guarantee to your family that they will get their money back. You can work out repayment terms and put down in writing interest rates applicable. If you are punctual with your payments, then your lenders will feel less stressed out about whether you are spending business money frivolously.
As mentioned earlier all matters regarding money needs to be dealt with earnestly. A business attorney will be able to help you out in these matters. Consider drawing up a promissory note with the specifics of loan mentioned. Repayment terms, late fees, interest rate and duration of loan should all be mentioned in the note. This gives legality and credibility to your financial dealing.
4. Equity Is Tricky
Some family members and friends may prefer equity or a share in your business in return for the money invested. You are not obliged to repay the money and if the business fails they stand to lose their investment. Equity holders have a share in profits and losses the business sustains. Friends and family who choose equity interest may not want to risk more than what they have invested. If you want to protect partners from personal liability for debts incurred by the business, you should consider a limited liability partnership or a limited liability company.
Shareholders are also free from liability beyond investment in corporations where they do not partake in decision making. A business lawyer should be able to help you in working out the formalities of arrangement.
Running a startup is not easy but it becomes all the more difficult when you have partners who do not see eye to eye with you. If you are getting someone who has entrepreneurial experience on board then they will be able to help you in many ways, but you need to be prepared for annoyances as well. Should you decide to move on to other ventures or make a pivot, you risk straining your relationship. So think twice and be very sure when considering a partnership with a loved one.
5. Balance Your Business and Personal Relations
Mixing up business with your personal life can make things highly stressful. Be tactful when managing expectations and relations. Ensure that you stay in touch with investors via monthly emails or phone calls. Get-togethers or a formal dinner every couple of months will help keep relationships warm. This will also help the people who helped you out feel invested in your venture.
A great idea cannot alone lead to a profitable business venture. You need a zillion other things to fall in place, with necessary funds to begin with being just one of them. But it is also the most critical factor that decides viability of your business. Financing from friends and family can help change your entrepreneurial dreams into reality, and if done right can be a valuable source of support and encouragement in your journey.