Asking family and friends to invest in your startup - The Basics

by Startacus Admin

Unless your friends and family happen to be ultra rich super billionaires with bottomless savings accounts, then broaching the subject of them investing in your startup has the potential to be a difficult, awkward and rather highly pressured undertaking. Some of you will no doubt already be cringing in horror at the mere suggestion of such an ill-advised coupling of business life and personal life, but for many people having family and friends invest in their business can prove to be a preferable alternative to the more traditional funding routes.

Benefits of having friends and family invest.

We are sure that you do not need us to highlight the possible downfalls of such an approach, but there are some really compelling incentives, which mean that you shouldn’t be too hasty to dismiss it as unworkable or indeed ‘unthinkable’!

• It’s easier than raising money in more traditional ways - on the face of it at least. Your friends and family are less likely to undertake the same level of investigations that others would.

• There is risk with taking on any investors but in this case the pressure can be somewhat delayed allowing you to focus on building the business the way that you want to.

• Your relationship with family and friends means that they will most likely operate on much more lenient terms than a professional investor, especially when it comes to things like equity share and repayment.

That is not to say however that you should view family and friends investment in a more flippant manner than you would a traditional investor - nor should you think of it as an ‘easy route’ to getting the money that you need. In many ways your level of responsibility is greater when family and friends are involved, and as such you need to exercise the same due diligence that you would otherwise take.

Define what you mean by family and friends

In our world of 1k+ Facebook friends and 10th cousins united through social media, it's fair to say that boundaries which once so clearly defined “friend” and “family” are no longer as rigidly in place. You need to consider carefully how wide you want to cast the net and realise that the strength of relationship which you have with someone will ultimately determine the way that you initially approach them with your proposition.

Of course, you have options here. You could for example adopt a ‘stage by stage’ campaign, by which you begin with those closest to you and work your way outward (adapting your campaign as you go) until you reach your target funding. Conversely you could begin with a very wide circle and work your way in towards your nearest and dearest.

Various approaches

If you are truly certain that this is the route for you, and that your family and friends can expect to benefit from investing in your startup, it is time to consider the rather difficult question of how do you go about actually asking for the money. This is where most people will really struggle, we are, as a nation notorious prudish when it comes to all matters financial, particularly with those we are closest to. A strong and self assured approach is necessary here to give you the best chance of success. A few options that you have to initially raise the subject are as follows;

Face to face, one at a time - Of all the options open to you at this point, this is perhaps the most direct and can be very suitable when 'pitching' your business to your closest family and friends who may find some of the other routes a little impersonal given their close relationship with you.  But you must also be cautious since such a face to face request can be daunting for the other party, particularly if they are someone who is not used to being in this kind of situation.  Make sure that you speak in a way that is clear and easy to understand and don't use too much business jargon. There can also be an added pressure on your family and friends to invest, with such a direct request so be sure that they understand that you are giving them the opportunity to say no, and that the choice is entirely up to them.

Crowdfunding - This is good because it affords both you and your family/friends a certain level of anonymity. In a sense the business becomes more detached from you which can a welcome dilution to the ‘uncomfortableness’ of mixing business with your personal life.  Such an approach can also be effective when you wish to cast a wide net, appealing to both your close family / friends and those within your wider circle. Crowdfunding can be particularly useful when asking for a small amount of money from a large number of people and will give you the opportunity to present your business idea and plan in a simple, straightforward way which is open for anyone to see. It can be effective in removing some of the pressure of asking for larger sums of money and opens up the possibility for outside parties to make a contribution as well. Be careful to make sure that everyone whom you wish to pitch has access to the crowdfunding campaign - some less tech savvy folks may not yet be familiar with the process so make sure that you provide an alternative way for them to access the information.

A pitching event - This approach can be a little more for daunting for you, but can save quite a lot of time in the long run, given that you can 'pitch' to all of your prospective investors at once... however it must be handled with tact and sensitivity to ensure that your audience does not feel pressured into investing. It is advisable that before planning the event, you gauge whether individual members of your circle are able and willing to consider investing- this could be done through having a chat with them face to face about it, or through email / social media, that way those you invite to the event are in some ways 'prepped' for your proposition and no one is blindsided by your request for money.  Be careful though that you continue to ensure your invitees do not feel obligated to invest and that you will not think less of them if they choose not to.  There is a fine line to be trod here and it might be useful to ask attendees not to hand over any money at the event but rather get in contact afterwards when they have had time to consider it.

A mass email - This can be a great way to inform your family and friends of your intention to start a business and your request for investment.  You should present the information in such a way that it says "I've got a great idea for a business, I'm looking for financial partners to get involved and wanted to offer you all the opportunity to take part if you feel so inclined" rather than "I'm starting a business give me money".  As was the case with crowdfunding this can be a great way to reach a large number of people within your circle without putting them under pressure and can lay the foundations for a more comprehensive campaign through some of the other methods listed above. The key with an email such as this, is ensuring that you layout your business idea in a clear and concise manner which means everyone reading it will understand and be able to consider your idea based on its merits.  

Hopefully you have found this brief introduction to asking family and friends to invest in your business useful.  You might also like to check out some of these recent posts.

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Published on: 6th July 2014