by Jamie Pennington |
There is no amount of lipstick that you can put on the problem: You need capital. And if you are like most entrepreneurs, you need capital quickly. It’s the people who have known you the longest who will likely be the first to bet on your success. Nonetheless, it is still tough to put hat in hand and go out and ask friends and family for funding.
In many ways raising capital is much harder than the other aspects of executing your vision of a business. According to Fundable, a popular crowdfunding platform, friends and family invest about $60 billion a year in startups and almost 38 percent of startups receive funding from this source. With only .05 percent of startups backed by venture capitalists in 2013, those in your closest circle are most likely to be the ones writing those early checks.
My company, SeeItFit.com, raised its entire seed capital at the desired valuation. Yet as is true for every young business venture, there are always lessons to be learned. Here are five of the things I wish I knew in advance about raising initial capital:
1. Don’t ask for money. Ask for help. My co-founder and I didn’t ask a single person for money. We simply said, “This is what we need. This is the idea. Whom do you know?” Several individuals came back and offered, “What about me?”
This proved to be the most effective way to ask without actually asking. If people are interested, they will take the bait. And if not, you are still likely to receive some warm leads. Either way, this is a strategy that preserves the integrity of the friendship.
2. Don’t accept every meeting offer. After wasting way too much time in meetings that should have never been set, it became apparent that we needed to do a better job of first vetting potential investors before meeting with them. Some people encourage entrepreneurs to take every meeting with the notion of “you never know where it could lead.”
But when you are under a deadline to raise capital, time is not a luxury you can afford to waste. As you work leads and introductions, be willing to meet with anyone, but personally confirm each meeting and be very clear that it is a funding meeting and include a minimum investment threshold.
3. Exaggerate the risk. Even with sophisticated, accredited investors, you need to exaggerate the risk associated with investing in your startup. The chance of failure is high for any early-stage investment, and the fact that the money comes from a friend can only complicate matters. Even if people say they understand the risk, and even if there are disclaimers and disclosures all over the documents, it’s important to have the conversation anyway. The “you never told me it could fail” discussion is one that should be avoided.
4. Hire professionals. Doing business on a handshake is wonderful, but when it comes to people investing in your company, hire a professional firm to do the paperwork. This also serves as separation between you and your friends when it comes to the details of the deal. Regardless of how long you have known one another or been friends, you and your investors deserve to have detailed documents about the equity or repayment structure of the investment.
5. Have a backup plan. Raising capital always takes longer than expected, so run at least one set of numbers that assume it will take twice as long to raise only half the amount desired. Under that scenario, find a way to succeed.
No matter how hard it is to raise that initial seed round, it’s truly is an honor and privilege to call those who bet on your business early on to celebrate the startup’s reaching a higher valuation or a milestone. Those moments make all the rest worth it.