Raising funds from friends and family

June 16, 2021
Man Counting

Your friends, relatives and family are your greatest supporters in life. They love to join with you in any kind of fun or activity. It’s a natural bond. Not surprisingly, friends and family are the second largest investor group in the USA, putting a staggering $60 billion which is more than what angel investors, VCs and banks put together at $56 billion. The biggest source of funding is the entrepreneur’s own savings and credit, amounting to $185 billion.

So, you can turn to your friends, family and relatives to make them a part of your venture because,

  • These are the people who love you and trust you.
  • Most importantly, they believe in you and your potential.
  • Don’t be afraid to ask your loved ones for a loan.
  • Plus, unlike with a bank, you’ll likely be able to get some money from your friends and family without having to pay any interest.
  • Who knows if you’re lucky, you might even get funds as a gift.
  • So talk to your parents, siblings, grandparents, or even your rich uncle.
  • Just know there are some risks associated with this approach as well.
  • You definitely don’t want to take a loan your friends gave you in good faith and lose it.
  • That could put both of you in a very uncomfortable situation.
  • Loans from their family contributed to their success because they had extra motivation to not lose the investment.
  • They didn’t want to let their loved ones down.

And also this is the easiest and earliest funding route for you, when you are still not ready for the professional funding from angel investors or VCs.

However, you need to be aware of a few things when you are raising funds from your close circle of friends.

  • Your friends or relatives are not any professional investors. They don’t understand a thing about entrepreneurship or what you are doing. They invest into your venture because of your relationship with them than anything else. So, you need not lie about your business or its returns. Just tell them about your business in plain terms and ask for their help.
  • Always make them understand that they could lose money and may never get paid back, if your business fails. Make sure that they realize this and are putting only a portion of savings into your business, not their entire life’s savings.
  • You need your relationships all through your life. So, don’t create a situation of mistrust with them.
  • You may take help in the form of loan, gift, investment or money in exchange for some favour. In any case, pay some interest or offer some small incentives to them or celebrate with whenever you had some major success. This will improve your relations, and they will stand firmly behind you.
  • Always be fair, acknowledge their contribution, make sure they get what is promised to them, and they are happy with it. A later stage investor may benefit more than early stage investors like your friends. It happens often times because of the very nature of funding. In such cases, make sure that your early investors like your friends and relatives get their due recognition and are paid equally like other investors. Because they trusted you before anyone else did, and they are the least selfish about it when they entrusted you with their life’s savings

At the end of the day, you have to balance between work and life and don’t want to mix them together. Nor you want to spoil one thing for the sake of the other.