Early-Stage Startups Need Friends, Family, and Fools

Early-Stage Startups Need Friends, Family, and Fools

Most entrepreneurs have learned that it’s almost always quicker and easier to get cash from someone you know, rather than angel investors or professional investors (VCs). In fact, most investors “require” that you already have some investment from friends and family before they will even step up to the plate.

You see, investors invest in people, before they invest in ideas or products. Since they don’t know you (yet), their first integrity check on you as a person is whether your friends and family believe in you strongly enough to give you seed money for your new idea. If they won’t do it, they why would I as stranger invest in you?

Friends and family will likely not expect the same level of sophistication on the business model and financials as a professional investor, but they do expect to see certain things. Here is a summary of some key items to think about as an entrepreneur before approaching friends, family, or even fools:

1. Don’t be afraid to ask, carefully. If you set around quietly waiting for someone you know to offer you money to fund a startup, you will probably have a long wait. On the other hand, if you open every conversation with “I need money,” you won’t have any friends or any money. Practice your “elevator pitch,” and end it by asking for the order.
2. Be upbeat and respectful. Nothing kills everyone’s optimism and desire to help quicker than a negative or arrogant attitude. If they are going to put cash into your company, chances are that they will expect to spend a fair amount of time together, either helping you or certainly discussing progress. Nobody likes a downer.
3. Be passionate about the idea. Friends and family will quickly detect your level of sincerity and thought behind the idea. You need to convince them that you have been working on this vision for a long time, and have done the “due diligence” on all the potential knockoffs. Daydreams and “the idea of the moment” won’t get much respect.
4. Demonstrate progress and your own “skin in the game.” Saying that you need money to start is not nearly as convincing as saying that you have built a prototype on your own dime, but need more to roll it out. We all know people who can talk a good game, but never get around to building anything.
5. Ask for the minimum rather than the maximum. We would all love to have a million dollars of funding to “do it right” and build the company of our dreams. But your chances are minimal of finding someone who will give you that much to start. Set some milestones for three or four months out, and show what you can do, then ask for more.
6. Communicate the risks, and write down the agreement. Be honest with naïve family members and friends about the inherent risks of a startup – at least 70% fail in the first five years. Don’t take money from family or friends who can’t afford to lose it. Think hard about the consequences of a possible startup failure and the loss of their funding.
7. Show some incremental value along the way. Look for ways to get some traction with a minimal product, while you are still developing the main event. In high technology, this is called “release early and iterate,” which allows you to make corrections as you go, as well as adjust for the market changes. It also shows progress to early backers.
8. Network to build investor relationships before you ask for money. Having a real project, rather than just an idea, is a strong positive when networking for angels or VCs. Now you really have something to discuss, and real credibility as an entrepreneur. Build the friendship first, ask for advice on a real project, then maybe money later.

Overall, don’t think of friends and family funding only as a last resort. There are massive advantages, like sharing profits with friends and family, as well as the strategic credibility than can be gained from funding from someone you know, rather than from a professional investor.

I hope all of these points seem like common sense to you, and you wouldn’t think of handling it any other way. Yet, I’m continually amazed at how often I am approached as a professional investor by strangers asking for a million dollars to fund an idea, without hitting even one of the above points.

We can all recount horror stories of families and friendships torn apart by money lost on someone else’s speculative dream. In these cases both the entrepreneur and the funding partner are the fools. Don’t be one.

Modern investors love to first read a two-page summary of your business plan, formatted like a glossy marketing collateral sheet, with text well laid out in columns and sidebars, and a couple of relevant graphics. This one had better grab their attention, or they won’t look further.

You may have already found several articles, web pages, or books about writing the perfect executive summary. They all offer a list of requirements that might take 50 pages to address, but of course they ask you to write concisely. Take a look at my website for the sample executive summary , which shows what can be done in one page (both sides).

Before you start, remember that the goal of the executive summary is to provide a printed version of your best elevator pitch, to provide a positive first impression to the reader. Think of it as a selling effort, not an attempt to fully describe your startup. Here are the key components:

1. The problem and your solution. These are your hooks, and they better be covered in the first paragraph. State your value proposition, and what specifically you are offering to whom. Skip the acronyms, history of thecompany, and the disruptive technology behind your solution.

2. Market size and growth opportunity. Investors are looking for a large and growing market. Spend a few sentences providing the basic market segmentation, size, growth and dynamics – how many people or companies, how many dollars, how fast the growth, and what is driving the segment. Skip the comment that you are conservatively estimating your penetration at 1%.

3. Your competitive advantage. Identify your sustainable competitive advantage, like unique benefits, cost savings, or industry ties. Don’t kill your credibility by saying you have no competition. At minimum, you compete with the way things get done currently. Most likely, the investor has already seen multiple plans with similar solutions.

4. Business model. Who is your customer, what is the price, and how much does it cost you to build one? Do you now have real customers, are just starting development. Outline your sales and marketing strategy (direct marketing, sales channel, viral marketing, and lead generation). Identify key quantities, such as customers, licenses, units, and margin.

5. Executive team. Remember that investors fund people, more than ideas. Why is your team uniquely qualified to win, and what have they done before? Explain why the background of each team member fits, by naming roles and names of relevant companies. Include outside advisors if they have relevant experience.

6. Financial projections and funding. You need to show your summary revenue and expense projections for three to five years. Investors need to know the amount of funding you are asking for now, and what they get. The request should generally be the minimum amount of cash you need to reach the next major milestone in your plan.

The above outline need not be applied rigidly or religiously. There is no magic that fits all startups, but make sure you touch in each key issue. You need to think through what points are most important in your particular case, and capitalize on your strengths. Key points skipped are red flags, and investor first impressions will go negative.

A final important element is not even in the executive summary, it is the paragraph you use in the email that introduces your company and has the executive summary attached. Less is more here, so include the grabber, show your passion and commitment, and be sure and ask for something (like a follow-on meeting or specific feedback). That’s your metric to see if you have their attention.

Points to consider while raising Entrepreneurial finance

Funding proposal

It doesn’t matter whether you are looking to raise Entrepreneurial finance from your bank, financial institution, private investor or a Venture Capitalist. At the end of the day you will need a good funding proposal.

The funding proposal outlines the details of your business plan, the vital numbers and forecasts of performance and financial viability. Your financiers are looking to invest in a solid business plan, so don’t leave any stone unturned when you draft your funding proposal.

Selection of creditors

One of the costs in any Entrepreneurial financing is the cost of inputs which can be in the form of services, supplies, raw materials or even finished products. These costs can represent a large portion of the initial funding

Traders are generally given start-ups credit in view of repeat business. So, select your creditors after due research and ask for longer credit periods to cut down your working capital requirement.

Investors

Investors, are a rich source of raising entrepreneurial finance. However, what you, as an entrepreneur need to be careful about are the terms of credit because this line of credit comes in the form of debt or equity. Though Debt is costly in the short term, Equity will reduce your share of revenue in the future. Depending on your forecasts and needs, make sure that you manage these terms.

Clean credit history

Your credit history is going to play a big role when you are looking to raise entrepreneurial finance, especially from the banks. So if you’ve been defaulting on your credit card or loan repayments, chances of you being able to raise entrepreneurial finance from your bank are slim. There are many ways to better your credit history and your past dealings with the bank and we suggest you start putting them into practice if you are looking to raise entrepreneurial finance in the near future