Entrepreneurs all over the country will hopefully be taking small breaks from their ventures to join friends and family for Christmas dinners and other holiday celebrations through the New Year. As conversations inevitably turn to what you’ve been up to and how your business is going, it’s a perfect opportunity to explain your capital needs and ask for an investment in your startup!
However, asking relatives and BFFs to risk their hard-earned money in your fledgling enterprise can be awkward.
To get some expert advice and best practices we reached out to successful entrepreneurs Susan Marshall, Co-Founder and CEO of digital marketing companyTorchlite; and Santiago Jaramillo, Founder and CEO of mobile apps companyBluebridge for their thoughts.
What’s the best advice you have for entrepreneurs on how they should start the conversation with friends or family?
SUSAN MARSHALL, Founder of Torchlite: Friends and family will invest because they believe in you, not necessarily the business idea — but you still need to treat them as though they were an outside investor. Start the conversation by explaining how you came up with the idea and how it ties back to your specific experience. If they are close friends and family, they will have a better idea of your strengths, weaknesses and passions and you can get them more interested in investing if they understand how those qualities will translate to your business.
SANTIAGO JARAMILLO, Founder of Bluebridge: Entrepreneurs should be very upfront about setting expectations. Most startups fail to provide returns for investors, so the likelihood of success is stacked against the friend or family member. The best thing to do is set expectations accurately, if not low, so that risks are transparently shared with the investment decision.
Should entrepreneurs ask for a specific amount of money, why or why not?
SUSAN: It’s likely your friends and family don’t invest a lot in startups and have no idea how it all works. You should know how much you need, what the current valuation is of your business and what their investment would look like. Do you want 10 investors or just one? Having more investors could mean a lot more time and effort for smaller amounts of money — so consider that when asking for specific money.
SANTIAGO: The answer depends on a lot of factors including the net worth of the individual (i.e. is it Grandma putting her life savings on the line, or is it a wealthy family member who is in a strong financial position), and how big the investment is relative to their net worth. If you are going to ask for family members to get involved as investors, it’s important to transparently discuss their expectations, as well as the risks they acquire by investing, so everyone is on the same page throughout the process.
What questions should entrepreneurs be prepared to answer from friends and family?
- What is your exit strategy (in other words, how long do I have to wait before I get a return on my money?)
- How can I help? If they are an investor, they will want to make sure you are successful, so in turn — they are successful. Be prepared to find constructive ways to keep them involved. It can benefit you in many, many ways.
- Who else is investing? Investors like to invest alongside people they respect or know. If you can, share interest from others and explain why they are investing.. (market opportunity, product/services solution, your background or experience)
SANTIAGO: Like any investor conversation, entrepreneurs should be able to talk about the business model, their business plan, monetization and exit strategy, the time expected to cash-flow positive and what the expected return will be. This gives the friend or family member a good expectation as to how soon the investment could pay off. Friends and family might be more inclined to check in informally, or even ask how the business is doing during family gatherings, so entrepreneurs might want to set expectations about when and how often questions should be raised and investments/progress should be discussed.
What advice do you have for entrepreneurs for how they should follow up with friends or family to actually get the money?
SUSAN: Give them a deadline. Tell them “the round is closing on X date. So and so are participating. I’d love to have you involved, but I need to know by X date.”
SANTIAGO: This can be particular tricky, because family members will notoriously want to support you, but might not actually put their money where their mouth is. My biggest advice here would be to give them easy means to actually give you money, but also know when to back off in case they’re second guessing their decision to be actively involved. I’d argue that it’s more important to maintain a strong relationship with a family member than get more funding dollars. You can make it easier for family members to actually get you money by offering several ways to disperse funds (via wire, check or cash) and document conversations well over email in order to set expectations.
Do you have a personal experience you can share from when you asked friends and/or family for investments?
SUSAN: I was hesitant to go to my friends and family at first, because most of the people I know have no idea what marketing or digital marketing is. Your best investors will understand the problem you are trying to solve, because they’ve been directly affected by it in some way. So, I started thinking about business owners I knew through friends who had experienced the problem I was trying to solve. That’s when I started to get serious interest from friend