It’s really easy to find information about raising money from angel investors or venture capitalists (VCs), but many people don’t think about another important way to fund a startup: raising money from family and friends.
I’ve raised money this way twice and want to share what I’ve learned, so you can raise startup capital from friends and family — and still attend family reunions.
Raising money from friends and family can be easier and less complicated than raising money from professional investors, but is not without drawbacks.
Startups Get by with a Little Help from Friends
There are certainly pros and cons to raising money from family and friends. When it came time to raise money for my first company, Entrustet, I had the choice to seek out angel investors or family and friends. We were able to raise six figures fairly quickly from a good group of private investors, which helped us stay focused on running our business rather than raising money.
Unlike working with an angel or VC group, that would have wanted to “get to know us” for at least three months, we were able to close our seed round in about six weeks. Four years later, we raised another round with significant contributions from friends and family in eight weeks.
How were we able to raise money quickly? How can you approach family and friends about investing in your business? What are the advantages to raising money from friends and family instead of angels and VCs?
Here are some of the things we did:
1. Be prepared.
We were able to raise money quickly because we wrote a detailed business plan. We used our preparation and research to get our friends and family to believe in us.
Before we asked for anything, we wrote a two-page executive summary of our business that included how much money we were trying to raise, our valuation, how much they would need to invest to own 1 percent of the company, why we needed the money and what we planned to do with the money when they invested.
This exercise helped us really key in on how to explain our idea and plans to our family and friends in clear language, free of jargon.
It’s important to avoid buzz words and cliches when writing a business plan, but it’s even more important when the intended audience is your family and friends. Friends and family are not professional investors and need you to explain your vision at a very basic level.