Tuesday 18th May 2010, 6:03am
An Entrepreneur’s Quick Guide to First Investors: Family & Friends
Nancy Fulton Mazur, Director of the Doug Richard Mentoring Club
I get this question a lot. “Where can I find investors interested in funding my enterprise?” The answer is, everywhere.
If you have a very good startup or small business demonstrating a readiness to grow, and you have any kind of significant presence in the media, investors may well start finding you. Investors like to see that your business has a proven value which good market presence usually verifies. Investors also want all the fundamental uncertainty gone about whether or not you can run a business, and whether your business can find customers and sell them things. Once you’ve proven those properties in your business, and you have a plan for how to turn a little money invested into a lot of money returned, you start to be of interest to anyone who makes money off money.But how do you get to that point?
The earliest material support provided to entrepreneurs and their business usually comes from family and friends . . .
Why Family & Friends First?
Taking money from family and friends for your business . . . every entrepreneur I know initially quails at the thought. But, here’s the thing. If your early stage business is really strong enough for someone to put money into, then you should feel comfortable telling your family and friends about the opportunity. Your path forward should be so clear, your prospects so certain, your customers so obviously ready to support your start or your growth that the funding that comes in from family and friends will go right back out to them at a profit. That’s not always the case of course, but even early funding should be provided when a business model is solid enough you know where and how the revenues required to repay that investment will be earned.
Note, that I’m not talking about the few hundred dollars you need to buy a computer, cover basic travel costs, or address your need for printer paper and photocopies. Family and friends of new entrepreneurs often provide this level of support without particular thought of return. An old computer, a rail ticket, a used printer are often just holiday and birthday gifts. In fact, as an entrepreneur one of the nicest things you can do as you become more successful is pass off your old equipment to friends and family working to start work on their own enterprises. That early “capital” is often the critical investment brand new businesses need most delivered at a time when they need it most.
But when you start needing cash to fulfill existing orders or scale your business up, family and friends will want a more formal relationship involving a discussion of return on investment and risk. If your opportunity is good enough for them to take a risk on, given that you’ll see them every year for the rest of your life and you’d like to retain your family and friends, it is worth coming up with a formal business relationship for a short term loan or a small investment that lets you get that first “step ahead” of your bills into a cash flow positive position.
And if your opportunity is not good enough to guarantee that, you must ask yourself why it is a good enough risk for anyone else to take. You must think about what you can do to make the opportunity better.
The Right Conditions for Family and Friends Investment
Investments from family and friends should be small, secure, and very safe. They should usually be based on the idea of fulfilling existing orders. They should generally be fully documented, with terms spelled out for what will happen in case of default. For any except the smallest amounts, a lawyer should be involved in drawing up the agreement. It’s best to start with a very small deal, and then (as trust develops), deals can get larger. Whether it is stated or not, all family and friend loans are “personally secured” if you intend to keep the family and friends after the deal. Obviously friends and family forgive debts all the time, but it is not something that’s ever particularly pleasant.
Tags: Articles, enterprise finance scheme, investment, investment ready, small business, starting a business
