How to Approach your Friend and Family when you want to Start Up ??

Design a Strategy: -

In order to get funding, it’s necessary to decide how to ask money, small amount from many or large amount from few investors?

Entrepreneurs believe that small sums have created less pressure in ruining a relationship. A research indicates that a friend will not think a lot about when he is losing $10 but only 10 to 20% of the population contributes out of the total population been asked. This means to raise $500 dollars at $10 per Investor, you need to ask 250 to 500 people.

Planning for large sums can turn out to be an easier option with proper planning in such scenarios.

Most of the sites raise funds by targeting dozen of people at $100 to $500 apiece.

Type of Investment:-

Before you accept the money and structure the transaction, it is important to decide on the type of Investment. What will you offer the investor:-

a) Stake in the Company

b) Pay Back Loans or

c) Offer a token of thanks through some freebies or gifts.

All investors look for return during the time of Investment and so do family & friends. If you take any investor, they will want a portion of your company or an equity stake or a place in the Board of Directors. Considering friends and family will lead towards selling of stake, buyback etc procedures.

Payback of Loans gives rise to interest and principal amount which will affect the cash flow in short and long term.

Nothing is free in this world. Offering of freebies or token of thanks will also incur cost and same has to be accounted for the free distribution of gifts.

I remember a friend saying it to me “ If you invest $1 in TATA’s start up, you will still want a return”

Draw an Executive Summary:-

Usually Friends and family members don’t prefer to read a 50 pager Business Plan. They will like to know the structure of the business from you sitting with a cup of coffee and hearing you explain the idea.

To avoid being too informal in such cases, writing down a 5-7 page executive summary helps in telling what you want to do, when and how you use this money with key challenges and issues, competition and risk associated with your plans. This gives an effective understanding of your idea.

Back Up your Business with Documents:-

Communicating with friend and family and getting into agreement often lead a casual attitude of dealing. At the time of dealing, with people whom you know well, insisting on agreement with help of structured documents help in avoiding hassles at the later stage.

Manage Expectations:-

It’s important to manage the expectation of family and friends in the business and the best way to meet this is to email them the monthly/ quarterly or half yearly performance of the business. Being honest to them and informing them continuously about things keep up their interest. If the things aren’t going right, these are the people who will guide you to the right people or support and can also help in raising or investing money at later stages.