Thanks to my past professional life as a political fundraiser, I’m acutely aware of the time and energy required to raise money, as well as the difficulty, stress and deadlines. As I work my way through a private placement on a personal venture, I’m learning new lessons about raising money from friends and family.
For entrepreneurs looking to secure seed funding, but who are unable to approach banks or venture capital firms, tapping their own network for funds can be the best route to early success. In fact, about a quarter of entrepreneurs rely on loans (16%) or donations (9%) from their inner circle to launch their businesses. Companies including Amazon, Virgin and Def Jam Recordings were launched with money from friends and family.
No matter how great the idea, summoning the courage to ask people close to you for money can be uncomfortable for both sides. Concerns start to creep into the mind of the entrepreneur who might question the depth of a relationship. If the person declines to invest, do they not value your friendship? Do they not believe in you? Do they not trust you? Do they not want to be helpful when you need it most? I’ve found it is far easier to make an ask of a perfect stranger than it is a close relative. Fundraising, though, is partially about fearlessness and one’s willingness to be comfortably uncomfortable.
How do you face Aunt Mary over Thanksgiving turkey after she’s told you there’s no way she’d help finance your dream, or, maybe worse, you’ve put her in financial straits?
Awkward moments are inevitable when you’re asking those close to you to contribute. Unlike a bank, friends and family generally aren’t investing solely in the business. They’re speculating on you personally, saying they have enough faith and trust in you to risk their money.
That adds pressure beyond trying to get a business off the ground. It can create enormous social and emotional obligations for entrepreneurs. They feel the need to “make good” and prove to everyone, investor or not, that they were worthy of the gamble. I’ve found that people who decline to invest in me have provided increased inspiration to drive me and fuel my already sky-high desire to succeed — partially to prove them wrong.
Regardless of how you slice it, a friend, mentor or family member turning you down isn’t the end. Consider that simply getting an answer can be a victory — a “no” allows you to move on and dedicate your time elsewhere. Plus, it’s important to ensure the longevity of your important relationships and avoid damaging them.
Anytime you borrow money from relatives or friends, experts say it puts a strain on the relationship, regardless of how close you are, or how diligent you are about repaying the loan or keeping your investors informed about your business’s progress.
Of course, the flip side is that their initial belief in you pays off and you are able to build a successful business and make your initial investors a nice return in the process.
How do entrepreneurs balance asking for money with maintaining relationships?
It’s important to ask the right people. Ask only those who can afford to invest — and potentially lose — whatever money they put in and those who you’re willing to risk some emotional distance from. Particularly if the business sours, there’s a chance their money and your relationship will never recover.
A few other tips for seeking private financing from family and friends include:
· Treat the “ask” like a business meeting, whether it’s at a coffee shop or your grandmother’s kitchen table.
Come prepared with a professional business plan and a sample or example of your product.
- Be willing to answer all questions about the business and your budget, no matter how invasive or seemingly irrelevant.
- Insist on paying fair market interest, so there’s no question about ownership and who’s in charge. Plus, paying fair market interest will keep the IRS from sniffing around what could otherwise look like a gift, which is taxable.
- Don’t hide or fudge information. Lay everything out clearly and honestly.
- Put everything in writing, including interest rates, late fees, repayment terms and loan duration, and use an attorney to draft the documents.
- Don’t rush a decision. Allow them time to consider all the ramifications.
While it’s hard to do, keep pitches on a professional level and remove your personal feelings so the relationship can continue without any residual guilt or anger if they refuse. Whether they invest or not, friends and family will remain part of your life. With some forethought and clear communication — and a little bit of luck — asking family and friends to invest can lead to big returns.