Raising capital is one of the major business challenges faced by entrepreneurs; especially when it comes to starting a business from scratch. It’s much easier to raise capital as an established entrepreneur than to raise capital as a first time startup entrepreneur.
Since the need for capital is a business challenge that stress entrepreneurs the most; I am commencing a series dedicated to helping you raise seed capital for your new business startup. This series will address the issue and challenges of raising capital and today; I will be tackling the challenge of raising seed capital from family and friends because one of the very first places entrepreneurs turn to when seeking startup capital is their family and friends.
The importance of family and friends in the life of an entrepreneur can never be over emphasized; so this article will be dedicated to teaching you how to leverage your family and friends to launch your business successfully.
Now how do you leverage your family and friends to successfully start a business?
How do you raise seed capital from your family and friends?
Well, I will advice you read on because I am going to tear this subject apart. This year, my team and I decided to directly attack the issues pressing entrepreneurs the most and our starting point will be the issue of raising capital. There are many creative ways to raise seed capital for your startup business venture but I want to take it from the grass root which is raising capital from family and friends.
Raising startup seed capital from family and friends happens to be one of the easiest avenues of raising capital that entrepreneurs can exploit but if wrongly done; you can get your fingers burnt and the process may even end up destroying the existing relationship you have with your family and friends.
Raising seed capital from family and friends is quite easy if you do things the right way. After all, most successful entrepreneurs and drop out billionaires started business with capital sourced from family and friends. Example of successful entrepreneurs that raised startup capital from family and friends include Richard Branson, Bill Gates, Berry Gordy, John Johnson, Ingvar Kamprad, Orji Uzor Kalu, Aliko Dangote, Li Ka Shing, Howard Hughes, etc.
Now if these famous entrepreneurs can successfully start a business from scratch with seed capital raised from family and friends; I don’t see any reason why you can’t do it. Now how do you raise seed capital from family and friends?
How to Raise Startup Seed Capital from Family and Friends
1. Be in the Right Mindset
If you are not in the right mindset, forget about trying to raise seed capital from your family and friends. Now why do I emphasize you be in the right mindset before trying to raise capital from your family and friends? You need to be in the right mindset because you will still go through the entrepreneurial process of raising capital. The fact that you are trying to source capital from family and friends doesn’t eliminate the odds of disappointment.
What if your trusted friend turns you down? What if your most loved one says no to your business plan? How will you feel if you get laughed at by your loved ones? The answer to these questions is the reason I emphasize you be in the right mindset. Before trying to raise capital from family and friends; you must be prepared to face rejection. In fact, expect disappointment from even the person you love most. The reason I emphasize you be in the right mindset is because disappointment from your family and friends can strain the good relationship shared.
I think I have had a personal experience with respect to this case. I remember vividly when I caught the entrepreneurial bug some years ago and began nursing the desire of running my own business. I had some excellent business ideas which I was excited about and my determination to scale through kept my head buried in books while my mates were partying. I even attended seminars to sharpen my entrepreneurial skills and learn how to build a business.
With a feeling of confidence and excitement about starting a business, I shared my business plan with my parents. But instead of getting a word of encouragement; all I got was a hard stare from my dad and a detailed explanation of how incompetent i am with respect to starting a business. My dad told me to my face that I was still a kid and advised me to face my studies.
To be sincere with you, I was very disappointed. In fact, I was annoyed with my dad back then. After all my effort and time spent developing a business idea, drawing up a business plan and honing my business skills; my dad had the effrontery to call me a (incompetent) kid despite the fact that I had spent reasonable time running his own business. I felt like giving my dad a punch in the face for challenging my competence; and if not for the encouraging words from my mom, I don’t know what would have become of the sweet relationship between me and my dad.
As I lay on my bed and recalled this particular experience; it occurred to me that young entrepreneurs all over the world may also be going through this same experience and that was why I wrote this article. No matter where you are sourcing your startup capital from; always respect the odds that you can get turned down. Don’t take rejection personal; it’s the norm in the business world.
2. Build up your Credibility
Now since the odds of raising seed capital for your startup company remains the same despite the source you are exploiting; then how do you increase your chances of getting the financial support you need? The answer to that question is “credibility.”
What are you known for in your family? What’s your level of relationship with family and friends? Can you be trusted? How well did your past dealings with family and friends go? Have you handled any project on behalf of the family? How do you live your life? Are you an asset to the family or a liability? Are there any habits that could be a hindrance to your aspirations?
These are the questions you must answer before trying to raise capital from family and friends. Nobody wants to give money to a scumbag or an incompetent friend or relative and neither would I. I once told my immediate younger brother that I would never invest a dime in any of his projects if he doesn’t gain a stronger control over his life and finances. I made this statement to help my brother have a greater sense of responsibility.
If you haven’t got control over your life and the way you spend money; then it’s high time you change and reconsider you life’s pattern because a single bad habit can reduce your chances of raising money from family and friends. Remember that these two groups know you to the core; they know your strengths and weaknesses. In fact, they know personal things about you that even Venture capitalists and angel investors may never find out.
3. Have a Good Plan
Don’t walk up to your members of your family or friends and try to raise money without a good business plan. No matter how much they love you, they will still want to know what you need the money for. Even if you are not going to share the intricacies of your business plan with them; at least they deserve to get an overview. Understand your plans like back of your hands especially when you are coming from a family of intellects or trying to raise capital from learned friends. If your plan sounds too shallow or incomprehensive; you may be denied the financial support you need. But before sharing your business plan with your family and friend; make sure the step one and two above are sufficiently taken care of.
4. Have a Good Story to Tell
Do you have a good story backing your business plan and intentions? If your answer is no; then you better reconsider your approach because your proposal and request may be thrown back at you. The fact that you are trying to raise capital from family and friends don’t mean you should take them for granted. Threat them professionally with a touch of informality and back your business plan with a good story.
How did you develop your business idea? What are your chances of success? How viable is your idea? Try sharing the answers to these questions with your family and friends because it has been proven that humans listen to stories more than anything else. So share a story worth telling about your business plan.
5. Select your Targets
A good rule of thumb when raising seed capital from family and friends is this; “don’t go telling every dick and harry in your family about your plans.” Select a few prospects among your family and friends that have the potential to provide the capital you need and prepare a pitch tailored to their life pattern.
For instance, when I was trying to pitch my dad to invest in my business idea; I prepared myself properly because my dad was a strict individual who knows the fundamental intricacies of business. He doesn’t believe in throwing money around; and when it comes to money issues, he is strict about it with his children.
So knowing my dad was a no-nonsense person; I had to be straight and clear while pitching my ideas to him. Though, I still got turned down; I left his presence with some lessons about the challenges involved in raising capital.
The lesson I am trying to extract here is this; “the way you pitch a family member of high intellect will be very different from the one used to pitch a friend who is an entrepreneur; or a family member who is stingy when it comes to money.” Different pitch for different people and situations; never use the same words for people with different core values. What may attract a professional investor may turn off an scholar.
6. Sell Yourself
The next key to successfully raising seed capital from family and friends is your ability to sell yourself. Why should your family and friends give you their hard earned money? How are they sure the money will be used judiciously? How are they sure you are not trying to con them? You have failed on a previous project, why should they trust you on this one?
This is where selling yourself comes in. This is where you sell your potentials and competence to members of your family and friends; this is where you prove that you know your onions. If you successfully carry out step one to five and you miss it here; all your effort will be in vain. You will never get the needed capital.
7. Ask for the Money
If step one to six goes successfully; then you have to take the next action step which is asking for the money. Before asking for the money; you must be definite on your plans, you must know how much you need and the terms involved. Nothing annoys me more than an entrepreneur pitching me with his business plan and when I ask how much in capital he wants to raise; he or she becomes speechless or uncertain. So when raising capital from family and friends; it’s advisable you know your business plan like the palm of your hands, sell yourself excellently and ask for the money.
As a final note, these are my seven strategic action step plan to raising seed capital from family and friends. Remember, the key secret to raising startup capital from any source is creativity; thorough understanding of the business fundamentals and a good presentation. Once these three keys are locked in synergy with the seven action steps listed above; you will be able to raise any amount of startup capital you need.