Do you have a brilliant idea for a startup but have little or no capital to bring it to life? Feeling guilty that you’re mentally running through a list of wealthy relatives and financially stable friends whom you can hit up for an investment? Don’t feel bad. Some of the most successful startups were funded by those nearest and dearest to the founder.
Why You Should Pitch to Family and Friends
It’s no secret that when looking for investors for your startup, the first people you should approach are those in your inner circle. In fact, they may even be offended if you don’t. Moreover, if you contact venture capitalists or angel investors first, these “financial types” may question why no one from your family, friends or community are backing you. This may in turn lead them to question your integrity and credibility.
Yet, it’s understandable why you might be hesitant to involve family and friends. Not everyone has entrepreneurial families (like Walmart) who get excited at the thought of a new business venture. For those people, it’s almost expected of them to either take up the family business or build something of their own, and tapping the relatives is practically a given.
However, some families just aren’t adventurous when it comes to investing in business ideas. Maybe they’re in traditional office jobs and have been employees most of their lives, with little risk involved. Maybe they’ve raised a family and have never worked outside the home. Or maybe they’re just not good at envisioning what could be rather than what already is. These types will be more difficult to convince.
So if you’re an entrepreneur, it’s up to you to present your idea in a way that proves you’ve considered all the potential risks and rewards. To get you started, here are some tips on how to approach family and friends to help you launch your new business:
Casting Your Net
First, you need to have some idea of the financial wherewithal of the folks you’re going to approach. If not, find out. It’s a really bad idea to ask a cousin who’s going through money troubles with a baby on the way to invest in your venture.
Second, compose your elevator speech and memorize it. Why is your idea new, different, innovative, worth investing in? Who are your competitors? Will you be an “only” or a “me too”? What problem will you be solving for consumers? How are you going to make people’s lives easier?
Next, make a list of people who would most likely be open to hearing your business idea. I encourage you to think big here. Include every person you’ve ever made a connection with between kindergarten and present day.
Once you have your list, think about timing. Just because you have friends who have done well for themselves, it doesn’t mean you can casually drop by, expect them to jump aboard and immediately write you a check.
Instead, test the waters with a quick email, text or DM to your prospects to let them know you have a business proposal you’re really excited about. Ask if you could meet with them to explain it more fully, then see how it goes from there. With this soft-sell intro, you’ll be amazed at how many of your family and friends are more than happy to sit down with you to hear your great idea.
The Right Pitch for Each Person
Remember, the way you approach a great-aunt with zero industry knowledge is quite different from how you pitch an old college friend who now runs her own successful business. For your pitch to be effective, you need to know your audience.
Some people will be sold within the first few seconds, basing their decision on how much they like you and believe in your integrity and smarts. Principally, they are investing in you more than your business proposition.
Then you've got people who want to hear more, not because they don’t trust you, but because they take anything money-related very seriously. They want to invest in something that has potential for making, not losing, money. These types of folks will evaluate everything from your level of commitment to your market knowledge to your business experience. They’ll want to see your business plan and how you intend to use your (their) funds. Plus, they’ll likely ask for some time to calculate the risks before giving you an answer.
For these reasons, you need to prepare multiple pitches.
Share Your Plan to Manage Funds
Not surprisingly, many people are hesitant to invest in startups because they have a high failure rate. In fact, according to Forbes, 90% of startups fail. That’s why it’s crucial for you to convince your list of potential investors why you are that 1 out of 10 who will succeed.
So what can build their trust and give them confidence that you’re a good investment? Transparency. From the very start, it’s vital that you know exactly how much money you’re going to need to get your venture off the ground and how much you need from the particular person you’re meeting with. It lets them know you’re responsible and you’ve done the math. In addition, it’s important to show them how you intend to use the funds. Creating a plan for how you’ll manage the capital will also help you keep things in check.
Avoid a Common Startup Trap
One of the main reasons startups fail is mismanagement of funds. Many entrepreneurs recklessly start spending left and right once the money comes rolling in, especially if they get more than they initially need. This often leads to one bad financial decision after another. They don’t wait until the business is profitable before they lease office space when they could have worked perfectly fine from home in the first year. Or they buy state-of-the-art equipment when it isn’t necessary. Worst of all, they start to reward themselves financially before the business has officially launched.
Avoid these pitfalls by creating a plan that clearly shows how you’re going to manage your capital. Outline all your expenses—from equipment and inventory to software and hardware. Know how many people you need to hire and how much you will pay them. Remember that you also need to pay yourself. Your investors don’t need to know everything down to the last cent, but they should be able to see that you’re not going to be frivolous with their money.
Keep Some Emotional Distance
When it comes to asking family and friends to help you start your business, don’t take it personally if they’re not lining up to invest. Many entrepreneurs don’t even go there. But if you do decide to ask your inner circle for money, be thoughtful, respectful and don't take offense. And if they decline after hearing your pitch, hopefully they’ll still support you wholeheartedly as you launch your new company. Good luck!
Read, Listen, Learn
For a broader perspective on how to be a successful entrepreneur, check out these blogs and podcasts:
Blog: Why Is the Buyer's Journey Critical for Successful Entrepreneurs?
Blog: Entrepreneurs: Focus On Unmet Needs Through Visual Exploration
Blog: How To Make Your Startup A Success When You're Over 50
Podcast: Andy Simon—Confessions of a Successful Entrepreneur
Podcast: Finding The "Holes in the Cheese" To Build A Successful Business
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