If you are a startup founder, you must have heard the term “friends and family” quite often! And you might have asked yourself how to approach your friends and family and what kind of investment you can seek from them!
Given the risk profile of most early-stage tech startups, equity is the most likely (and maybe only) option for raising funds especially at early stages of your business where you are not generating any revenue either. In this article we will provide you with a practical guide with regards to investing in a friend's startup!
What is a Friends and Family Funding Round?
First things first: Is now a good time to raise money? The Friends and Family Round is often the first money in, so it's important to consider whether you should raise at all.
Before you ask people you know, trust and admire for money, you need to be confident that you will put it to good use. Ideally, you have evidence of a demand for your product or service and an idea of how your business would use the money to grow. Raising capital puts the spotlight on you. You take on increased responsibility, and future investors will evaluate how you used this money.
The Capital Pilot team always recommends ensuring that your business and its value are as developed as possible before you seek investment even if it means delaying your fundraising.
Should I Ask Friends and Family to Invest in my Business?
Friends and family are obvious starting points when raising money for your startup as most early-stage companies are too nascent for institutional investors to try to assess.
Early investors tend to invest more in the founder of a business than the business itself. Your existing network already knows and hopefully believes in you, so they require less complicated evidence of your potential for success than a total stranger.
When thinking about asking friends for funding, you don't need to consider just your closest friends. Some founders find great success speaking to ex-colleagues or friends and contacts of friends. In any case, early-stage investors are usually inclined to believe in your business because you are building it.
Any investor will require evidence that their money is in safe hands and that you will squeeze maximum value out of their hard-earned savings.
Using Early Investment Wisely
"Friends and Family" implies an informal investment but remember that first and foremost, you are asking people to trust you with a significant amount of money. You need to plan how you will use the capital and share this narrative with them. Even your parents will want to know that you've thought carefully about how you'll use their money, and documenting this investment process will benefit your business in the future.
It's unlikely that this is the last time you'll need to raise money, so demonstrating that you can execute your plans and do 'a lot with a little' will help you win future investment. Generally, the focus of a Friends and Family funding round is to generate traction and validation for your business model, which will help to attract later stages of investment.
Leveraging Your Friends and Family Beyond Investment
In some cases the friends and family that invest in your business might also have a passion for your business besides the fact that they know you and trust you. Some of them might be more hands on and willing to help your business grow too. At the end of the day, it is in their best interest to do so! Whether using their own expertise to provide advice or by opening up doors for your business to grow e.g. introducing to other investors or potential clients! Such friends and family investors can often be great advocates for your business so why not leverage them to help you get to the next stage too! Besides, including friends and family on your company’s journey can add a sense of community and excitement. It’s a great way to start building your business’ network.
How Should I Approach Friends and Family for Investment?
Decide on a realistic fundraising target. Make sure to decide on a specific amount.
Create a plan to deploy the capital. What will this investment help your company to achieve? What will happen next? Will you end up with a profitable business or one looking for more funding rounds?
Ask friends and family for an amount of money that you are both comfortable with and make the proposition clear. You wouldn't be asking for money if you didn't believe in your idea.
Consider EIS or SEIS tax relief which reduces the amount of money they stand to lose. If your business is EIS or SEIS eligible that is a great way to attract investors!
Consider using ‘Advance Subscription Agreements’ which is a form of equity investment where you receive the investment proceeds in advance of allocating shares which will be issued at a later date and often at a discount to account for the early risk.
If you don't have friends or family who would be able to provide help in this way, you might consider contacting someone you don't know who's passionate about the problem you're solving. Our article on Angel Investing explains further.
Timeline for Investment
This type of funding can be swift. In cases where trust is high and investors can access their capital easily, it can take just a few weeks.
Next Steps
A Capital Pilot rating provides an unbiased assessment of your business proposition. Achieving a high rating gives confidence that your investment proposition is in order and may well qualify your company for the Boost Fund as well!
Find out more about our rating and assessment.
Helpful Links
Silicon Valley Bank - Raising Startup Funds from Friends and Family the Right Way.
Founder Institute - How to Raise a Friends and Family Round
