One of the most common forms of startup financing is family and friends funding. It usually comes after or in tandem with the entrepreneur invests their savings or uses their credit cards to fund their idea. Family and friends funding happens before a bank or angel investor would show interest. Family and friends are typically an entrepreneur's best opportunity to secure money. They are usually investing in the entrepreneur more so than the idea.
Someone in your direct connection group may also be able to offer more than money. After assessing their strengths, an entrepreneur can consider bringing them on board as a board member or advisor. This can be a helpful way to engage their talents and lead to further business introductions. These introductions could potentially lead to future funding.
One thing to take into consideration before taking family and friend money are the what ifs. What if the business doesn’t succeed? How will the entrepreneur deal with sitting at a family gathering with someone whose money they have lost? One way to help avoid confusion is to have formal agreements in place. The agreements will clarify the terms, risk, and rewards to the potential investor.
Another way to accept family and friends money is a gift. Crowdfunding is often the vehicle used. It builds on the entrepreneur's network trading perks or gifts for monetary contributions to the entrepreneur’s idea. Many have found this model to work for them. The timeframe is typically 30 to 90 days and the amounts range from $25,000 to $150,000.
Entrepreneurs seeking family and friends money as their initial source of funding can use this as a marketing test. If they don’t understand the idea or fail to invest, then perhaps the idea needs to reevaluated. For many angel investors, it’s a red flag if your idea can’t attract family and friends financing.
An entrepreneur having ‘skin in the game’ is seen as an asset when seeking to fund. If you’re not willing to invest in you, why should others? Make sure you have at least an executive summary and financial projections done. Include in them how the money will be used. Present these to your family and friends as you would any investor. It shows them you are serious.
Be ready to answer questions, do presentations and if a prototype exists; show it. Anything you can do to show what you have already invested into the idea and how the funds invested will be used to grow the idea into a startup into a company. Now, go raise some money.