How to Raise Money from Friends and Family

The first place many businesses go to raise money is their friends and family. This post will show you how to raise a friends and family round.

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Reasons to Raise From Friends and Family

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• They believe in you: Friends and family members may be more willing to take a risk on your business idea because of their relationship with you and their belief in your abilities.

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• They are easy to find: It's easy to get in front of your friends and family, unlike other investors such as venture capitalists.

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• They will help you: By raising funds from friends and family, you can build a supportive network of individuals who believe in your vision and are willing to help your business grow. They may be more inclined to offer advice, introductions, and other support beyond just the funds raised.

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• Better terms: Friends and family may be more willing to invest on better terms than professional investors. That means you give up less of your business.

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• It's cheaper: Raising money from friends and family is often a handshake agreement. Because of this, businesses save on the legal and accounting fees it would take to prepare the required documents needed to fundraise from professional investors.

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Reasons to not Raise From Friends and Family

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• Mix business and personal life: Raising money from your friends and family could strain your relationships if your business fails to perform well financially or you fail to set clear expectations.

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• Not as well-connected as angels or venture firms: Grandma will probably not be able to find you a lead investor for your next round, while a well-connected angel or venture firm may be able to put your whole round together.

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• Most won't be accredited investors: Accredited investors have a minimum net worth of $1 million, at least $200,000 in individual annual income, or at least $300,000 in joint yearly income. It is now legal to raise money from investors who are not accredited (thanks to the Jobs Act), like some of your friends and family, but it may increase your compliance and legal burden down the road, which will cost you money.

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• Limited funds: Depending on the size of your network, the amount of capital you can raise from friends and family may be limited, which may not be enough to support your business needs in the long term and be worth the effort.

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1. Prepare to Fundraise

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Before you start fundraising from your friends and family, you must prepare yourself and your business. Take care of the following:

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• Write a well-crafted business plan: A solid business plan will help you communicate your vision and goals for your business to friends and family. Here's a step-by-step guide to help you write the perfect business plan.

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• Open a business bank account: Separate your personal and business finances by opening a business bank account. This will help you keep track of your finances and ensure you are not mixing personal and business expenses. Here are the best business bank accounts and a step-by-step guide on opening a business account.

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• Incorporate your business: It can give your business more credibility and protect your personal assets. Consider consulting with a lawyer to determine the best legal structure for your business.

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• Determine how much money you need: Before raising money, you need to know how much you need to raise. Create a detailed budget that outlines your projected expenses and revenue for the next 12-18 months. This will help you determine how much money you need to raise to achieve your business goals.

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• Practice your pitch: Before asking for money, practice your pitch. Your pitch should communicate your vision, goals, and how the investment will benefit your business.

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2. Identify Friends and Family to Raise Money From

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Start by listing everyone in your network who may be interested in investing in your business. This may include family members, close friends, former colleagues, and acquaintances. Next, consider people who may have a personal connection to your business idea, such as those in your industry or who have experience with entrepreneurship. Then, group your list based on the strength of your relationship and their anticipated investment level.

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3. Ask for Money

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Now, it's time to ask for money. This can be nerve-wracking, but it's essential to be confident and direct when asking. When asking for money, remember to touch on these key things:

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• Set expectations that they should only invest money they are willing to lose. Investing in any early-stage business is risky and could go to zero.

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• Be transparent about how much money you are raising and how you will use the money. Your potential investors should know what you need to launch your business or take it to the next level. 

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• Communicate the terms of the investment and what they receive for their investment. This may include the equity or interest they receive based on their initial investment.

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• Outline the risks and potential rewards of the investment. It's essential to be transparent about the potential risks and challenges that your business may face and explain how you plan to mitigate them.

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• Educate them on how long it may take to earn a return on the investment. It may take 10+ years to get a return for an investment in an early-stage business. Share with them your expected timeline and the events, such as an acquisition that may trigger a return.

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4. Track your Money

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Keep detailed notes on your spreadsheet to track the money from friends and family. It would be best if you were monitoring things like full name, email address, phone number, contact date, investment amount, investment date, investment type (cash, check, wire, etc.), and follow-up date. This is very important so that you can square away all the legal agreements in the future and protect your business, friends, and family.

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5. Follow up

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After you have received commitments from your friends and family, it's crucial to get the money in the bank by:

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• Set a timeline: Create a timeline for collecting the money from your investors and communicate this timeline to them. This will help create a sense of urgency and motivate them to follow through with their commitment.

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• Send reminders: Send reminders to your investors before the deadline for collecting the money. You can do this through email, phone calls, or in-person meetings. Be sure to communicate the amount of money they committed to investing and the deadline for submitting the funds.

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• Set up regular updates: Schedule regular updates with your investors to inform them about your progress. These updates can be in the form of emails, phone calls, or meetings. Be sure to update them on key milestones, financial performance, and any changes to the business plan.

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Tips for Raising a Friends and Family Round

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• Share momentum updates: Sending updates to your friends and family about the momentum of your round and business can get people on the fence to invest and get people who have already invested in supporting even more.

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• Follow up: Some friends and family will say yes, but not send you the money. Following up with this group is important to ensure you secure the commitment. It's not an investment until the money is in your bank account.

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• Start with your inner circle first: You always want to start with the people closest to you. The first money commitments are the hardest to secure because it's much easier to say no to a project with $0 in the bank than a project with $10,000.

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• Know your audience: It's wise to tailor your pitch to your audience. Don't pitch every family member or friend the same way.

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• Activate your new investors: Your friends and family now have a vested interest in the success of your business and may be more motivated to help you with things like introductions to customers or potential hires.

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Common Mistakes when Raising a Friends and Family Round

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• Not setting proper expectations: It's important to set expectations with friends and family members that they should only invest money they are willing to lose, how frequently you will update them on their investment, when they can expect to earn a return, etc. Failing to set proper expectations may strain your relationships. 

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• Not treating it as a professional investment: Just because you are raising funds from friends and family doesn't mean you should take it lightly.

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• Not educating your friends and family members: Most people don't know what an investment is. It's your job to educate them on what they get in return for putting money into your business. Continue to educate them as your business evolves.

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• ‍Not following through with legal agreements: Most friends and family rounds start as handshake agreements, but when your business has the means, you should square away all the legal agreements. This will protect your business, friends, and family from disagreements.

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Raise from Friends and Family Today

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In conclusion, raising money from friends and family can be a great way to get your business off the ground. Following the steps outlined in this blog, you can prepare to fundraise, identify potential investors, ask for money, track your progress, and follow up effectively. Remember to set clear expectations, communicate transparently, and be persistent in your efforts. With the support of your loved ones, you can achieve your fundraising goals and take your business to new heights. Good luck!

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