Step by Step Guide to Raise Startup Funding from Family and Friends

Startup Founders frequently turn to their Friends and Relatives for startup funding before approaching venture capital firms or even angel investors.

In the early phases of a startups development, and possibly after you and your co-founders have invested your own money, approaching your close friends and  family members is a reasonably simple and quick way to get a small amount of working capital to run your startup.

The "friends and family" list include close friends from childhood and college as well as contacts from their work places, supervisors, professors, neighbors, and service providers.

Here is simple guide to raise money from friends and family without having " uncomfortable conversation"  

• Make a list of all the individuals you care about and who could be interested in hearing about your journey on the first day of your business.
• Send them regular letters and occasionally phone calls. Make a schedule for yourself and stick to it. Because your business is growing quickly, give them updates at least once every two weeks.
• Inform them of all that is happening and what you are doing, and inspire them with your enthusiasm. Request their opinion on your idea as well.

Your end goal should be to idnety 10 people who can give you 5lacs each as their initial capital contribution

Financing from friends and relatives is always the quickest to complete, taking only a few months in many cases. Typically, rounds with friends and family raise between 25,00,000 and 50,00,000

General Considerations

A gathering of family and friends may seem less formal because everyone is acquainted. However, you should approach the round professionally, cautiously, and with a long-term plan in mind. In other words, approach the friend and family round of fundraising the same way you would any other VC Round.

Never bring up this subject in front of family or friends in a public setting. Set aside time for your social life. This distinguishes between commercial and personal. Bring your demo materials and pitch deck, and be ready to respond to inquiries. You should order your pitches from easy to toughest because you'll be surprised at how much better they become with each subsequent encounter.

"Never ask for money from friends or family members who can't afford to lose it". And you should never request it if you are very convinced that you cannot repay it in cash or equity. To repay any investor, increasing sales is the best course of action. The only investor for whom you can ensure repayment is a consumer, he continues.

In other words, make sure they are aware of the hazards involved and that they can afford to lose whatever they invest.

Have a clear fundraising objective. Make sure you have the funds necessary to accomplish your following fundable milestone. Reaching the stage where you have increased the value of your business by achieving significant, well defined goals and can raise the next round defines this milestone:

• Product and/or research development
• Voice of the customer studies
• Early sales and marketing
• Inventory, assets, and facilities

Terms of the Deal

If you do manage to raise money, I would strongly suggest staying away from any equity-based offerings. This will compel you to officially add your baby to your capitalization table, assign a value to it, and comply with securities rules.

A debt instrument, such as a convertible note or a SAFE, is simple to set up, quick to carry through, and provides a reward for these early risk takers.

Make sure everything is appropriately documented. This is crucial for upcoming rounds in addition to being beneficial for business. Recall the phrase "due diligence"? You'll need to demonstrate to potential investors that you manage your company ethically. You will need an attorney to help you write the proper investment documents for this round.

Timely Communications to Investors

I view every investor as a client. In order to diligently and frequently connect with your shareholders, you must have a mechanism in place.

By promptly sending out good news via email, the most sensitive material is removed.

Regular personal phone calls or coffee/lunch meetings are held with key investors. Who are the main financiers? Super angels, others who made big investments, angels who made many investments, and angels who serve as significant confidantes, mentors, or confessors

Every quarter, on the opening day of the new quarter, everyone receives a letter. Soften any challenging information or news. Include the following crucial information in your letter: significant accomplishments for the quarter, R&D, testing, clinical, commercial development, strategic development, fundraising, and financial

Once a year, you have a shareholder meeting, presenting a presentation on the company's activities using the large screen TV at the location. The appointment of the company's accountants, the election of the board of directors, and any other crucial votes must all be conducted annually.

Finally, 95% of the demands for due diligence are the same. Peer CEOs who "were too busy" to keep things updated and gave the task to their admins always infuriated me. I was able to respond to an investor's due diligence request in less than an hour because I kept a due diligence folder current at all times.

Keep in mind that note holders and shareholders are both clients. If you satisfy them, they'll probably return the favor and recommend you to others. If you offend them, you will encounter further difficulties.

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Also Read,

Step by Step guide to Find Angel Investor for your Startup

10 Things to do after Raising Money from Investor for your Startup