Is gathering around turkey and yams the right time to ask for a friends and family investments? The case for taking advantage of the season of giving.
The table is set. There's a turkey in the oven, and football on the flat screen. Children are out in the yard throwing leaves in the air. Ah, Thanksgiving...the perfect date to hit up rich Uncle John for an investment in your start-up.
"Friends and Family" money is the way many start-ups are financed. Yes, the stories of the entrepreneur leveraging her credit cards to the max and the guy who lives in his office eating ramen-noodle soup are true. But once you've fully committed your own resources to your business, moved in with your parents and sold your car, it is time to get your closest supporters on board with you.
"When other sources are unavailable or too costly, friends and family may seem like easier prospects," says Lloyd Shefsky, a clinical professor of entrepreneurship and the founder and co-director of the Center for Family Enterprises at the Kellogg School of Management. "However, in such circumstances the entrepreneur should be concerned whether risks she's willing to take are appropriate for those friends and family. After all, the critical question isn't whether to pitch the family at Thanksgiving dinner but how uncomfortable you will be at future Thanksgiving dinners."
While getting your family to invest could potentially lead to serious drama, it can also be a source of solid capital and good connections. If you have a successful relative, it is likely she knows some other successful folks who may be good connections for your business, from lawyers and accountants to CEOs at the country club. Once she invests, it is in her own self-interest to get you the introductions you need.
How should you start pitching to friends and family?
Shefsky says: "In general, I recommend pitches be done on a one-on-one basis, lest one person's hesitation or doubt infect others who might not have such concerns on their own. A good pitch to family shows passion, but is not a pure emotional pitch. Of course some have been successful with begging and guilt, but that can backfire both before and after the fact." Mark Birch, an angel investor based in New York City, says: "Treat anyone that you are taking funding from as an investor."
Birch suggests that what you would pitch an angel investor or venture capitalist isn't so different from what you should pitch to friends and family. So you should have something that is more tangible than merely an idea—at least a thought-out plan.
That's especially true in a time when so many entrepreneurs are going the online crowd-funding route, creating an online campaign, and being transparent about goals and funding needs. According to Slava Rubin, founder and CEO of IndieGoGo, "For any campaign, you definitely want to get your friends and family involved in the early stage, as it builds credibility. We find you need to get 30 to 40 percent of your goal funded before strangers will fund you. Thanksgiving is a great opportunity to show your pitch via computer or tablet, and talk the family through it. If they're ready to invest, great, but if not, send a follow up e-mail and let them fund at their own convenience." According to IndieGoGo, the site's highest average contributions occur in December, so now is a good time to seed the idea. (If your campaign isn’t quite ready, Rubin revealed that Indie GoGo's "Cyber Monday" strategy is to discount campaign fees 50 percent all morning on November 28.)
Define your "ask," and don't take it lightly.
If you're not doing a crowd-funding campaign with pre-thought-out levels, you need to know what you're willing to promise to potential investors. Will it be a promissory note, an equity stake, a convertible note, or loan for a period of time? Or are you asking for an advance on your inheritance? Birch says, "My personal thoughts on friends and family is to avoid this source for funding if at all possible. If you do decide to go this route, then get a good lawyer that has experience in this type of financing, and keep it very simple. Make it a "take it or leave it" offer, allow no negotiations, and offer up the minimal amount of your company in exchange for the funding." Birch wrote a post called "The Trouble with Non-Investor Investors," in which he describes the challenge of dealing with investment that isn't about the "shared risk and engaged support" start-ups need.
Both Birch and Shefsky expressed their own cautions about making family your investors. Investor Fred Wilson's post on Friends and Family has more reminders about the downside of losing money for family and friends. And yet, if you're confident about your business, and you've planned it well, you also have the possibility of making those folks richer. You're all in, now is the time for those who love and support you to back your vision. Pass the gravy!
What are your plans for moving your business forward this holiday weekend? Let us know in the comments. And a Happy Thanksgiving to all the readers of Startup Toolkit!