The Unexpected Challenges Of Raising Money From Friends And Family
When first discussing our idea for a startup that would solve a problem we personally experienced in commercial real estate leasing, we didn’t realize how challenging the first round of funding would be. Initially, we assumed we could raise funding from seasoned angels and institutional investors from the very start. However, we quickly learned that unless you’re a seasoned entrepreneur, it is nearly impossible to get investors to fund a startup that’s still in its idea phase. Like many first-time founders, we turned to friends and family for our initial investment.
After we solidified our idea and drafted a basic pitch deck for our new venture, we began testing the waters to gauge interest among our friends and family. We were passionate about our idea so it wasn’t difficult gaining their moral support. Many of them were genuinely happy for us and seemed excited to see how our idea would evolve, yet things only got tougher from there. We didn’t realize how challenging it would be to raise money from those closest to us.
Managing RelationshipsWhile sharing our idea and enthusiasm with the people we cared about most was great, we still needed an investment without burning our personal relationships in the process. As entrepreneurs, we wanted to exude optimism, but the reality was, we could not assure our friends and family we would be able to deliver on our mission and on their potential investment. It was very important for us to communicate this during our first conversation.
We knew that managing our relationships with friends and family would prove difficult if we pitched everyone we knew. In every circle, each person has his/her own risk tolerance. Financial situations can vary greatly, and when it comes to investing, it doesn’t necessarily matter how close you are with the person. Someone with a new mortgage expecting their second child may not be in the best position to take these sorts of financial risks, even if they are your best friend or closest relative.
It was difficult having to classify our friends and family in this manner but by taking a case-by-case approach, we were able to better manage our relationships and proceed along the fundraising path. In life and in business, relationships are what matter most – so don’t jeopardize them blindly chasing after the money.
Asking the Million Dollar QuestionAfter testing the waters and presenting our idea, we asked our friends and families if they would be willing to invest in our concept. We walked them through a basic pitch deck and did our best to convey the market opportunity and our passion and willingness to work hard to build out this business.
But this approach on its own didn’t always work. Some people wanted to see a detailed business plan with financial projections, including the go-to-market plan, growth strategies and cost structures. They wanted to truly understand the business, and rightfully so.
Just because you personally know your potential investors doesn’t mean you should approach them any differently than you would approach an institutional investor. Like us, you should provide all the information necessary for the potential investor to make a smart and informed decision. Even with close family and friends, sometimes the old saying “it’s not personal, it’s business” still applies.
Providing TransparencyTransparency is critical to any great relationship, especially when it comes to business partners, investors and customers, and it’s twice as crucial when considering an investment from friends and family. From the beginning, we made sure to be completely transparent about the risks involved in investing in something as illiquid as a startup.
We shared as much information as we had at our disposal, including not only revenue projections and the growth opportunity but also the various performance milestones we needed to hit and the associated challenges/risks of each step. We then laid out exactly how we would be spending the initial investment to help achieve our first milestones. Including this level of transparency helped us demonstrate our understanding of the business and our ability. Ultimately, it helped us gain the confidence of our friends and family as business professionals.
Our experience raising money from friends and family was a lot harder than we had imagined, but we were very fortunate that quite a few people were interested, even after we laid out the risks and the long payback period. It was a difficult process at first but we quickly learned from our mistakes and were able to raise our first $300,000 to help jumpstart our business.
Source:
https://www.forbes.com/sites/leewasserstrum/2016/05/24/the-unexpected-challenges-of-raising-money-from-friends-and-family/#84f5a73519b0
