When you need financing to get your startup up and running you could ask your friends and family for they money. This is indeed the first round of collecting funds for your business. No one will give you money and trust in your project if they see that you have failed to convince your closest ones that the project will succeed.
How to ask family and friends for funds for your startup, then?
Getting money from friends and family is easier than getting them from strangers and the amount depends solely on who they are. If you have an uncle with deep pockets, you may be in luck, if you don’t know anyone who has some spare cash, it may be tough.
Remember that you can raise a very small amount from many different people. Statistically 38% of startups manage to secure funding from family and friends and the average invested amount is 23,000 dollars.
To show that you are serious it is recommended to use some of your own money before you ask family and friends for funds to run your startup and make a prototype. You don’t need to show them statistics or professional business plans, because they will back you based on trust rather than cold calculations. It is still a good practice to explain exactly what you are going to spend their money on, at least to show that you plan to spend it wisely.
Never lie about the chances of success
Your friends and relatives are the people you will have to live with no matter if your business fails or succeeds. You don’t want to strain those relationships. This means you have to be open about the possibility of your business failing. In the first five years of operating 55% of startups go under, so the chance that you fail is real.
I know that you may be thinking about this prospect constantly, hoping to find the way to stay in the business. To you the risk may be obvious and ever present, but your friends and family are oblivious to those facts. They may, out of love and friendship with you, completely fall for your narrative.
They may, and probably will, see your business as a sure bet and will underestimate the risk involved, so your job is to explain the risk to them. And you should not just quickly glance the subject over, but educate your closest ones in detail about it.
They really need to understand that they may never get their money back. That this is a possibility as real as, or even more real than your success.
You may feel the temptation to misrepresent the chances hoping that somehow you will manage and the company will be successful no matter what happens. Don’t do that! It is understandable that you have a good feeling about your business prospects and about your entrepreneurial skills, but if your business fails, you may end up with nothing left.
You may lose the friends and family you cheated out of their money and you will have no company and no friends.
Remember that even if your friends and family don’t want any return of investment on the money they lend you, it is still a good thing to offer it to them. At the very least adjust the money you will return by the inflation, so they won’t lose a dime on this lending.
Tying repayments to the revenue growth of your company or offering equity rather than the money are good business practices and you should seriously consider them.
Don’t forget about a formal business agreement and the laws in your country about acquiring funds for business.
Test your presentation skills
It is easier to talk with your relatives and friends than with strangers or cold, calculating investors. This means you can start learning how to give a proper business presentation, and from there prepare for more daunting challenges in the future.
Having less of a public speech anxiety, when talking with friends, you can work on more technical aspects of giving presentations, and having those covered it will be easier to feel confident in the future.
You know your friends, so you can monitor and recognize their reactions to the points you are making. This way you can get some feedback without having to worry if you have read your audience’s reactions properly.
Ask them about your performance and what should be improved after the presentation. They care about you, so don’t frame the question as “How good I was”, but ask about specific details on what could be improved. They will feel more comfortable pointing out your weaknesses.
If you have one friend who seems to have no problems in being critical about other people and the world and his opinion generally holds water, then you are in luck. Use his straightforwardness to improve your pitch. Get his feedback implemented, but remember you should value opinions of different people so, never rely on a single person opinion.
Don’t forget that you can and should run the presentation through your people several times, making improvements at each step, incorporating their feedback and improving. This is the stage at which you can change your pitch significantly and several times, so use it.
When you ask family and friends to fund your startup it means you have made a first serious step at creating your new company. There is no backing out now, so you should be 100% serious and ready to go forward from this point on.
This means that your business plan better be sound before asking for money and if you are still not sure if it is good enough, you should return to the drawing board.
We also wrote an article about other ways of financing your startup.