October 20, 2008
Raising Capital From Friends And Family (Part 1 of 3)
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The single most frequent question that I receive about raising capital is to raise capital from friends and family. Of course, people want to know where to get big money too — but you have to learn to walk before you run, so I have put together a beginner's guide to successfully raising the money that you need to launch or grow your business from people who are close to you.
This will be presented in 3 simple parts. Please let us know how it helps you by writing comments at the bottom of our blog. Shortly, we will make all of these available in an e-booklet. If you need any help, please call our office.
Overview When trying to raise money for a new venture, you'll probably first go to friends and family (i.e. sometimes called "family & fools"). The following material has been prepared for entrepreneurs who will be going to this group. However, if you're calling on your grandmother, these rules will probably not apply.
The Bad News Access to capital in the United States is not a constitutional right. Unfortunately, many people will simply not get any.
The Good News If you do it right, money will flow your way. But do you want to know the $64,000 question? Here it is: What does it mean to "do it right"? Follow the comments below for an overview of how the fundraising process works.
Seed Capital The very first money that you put into your deal is called seed capital. I get numerous requests for seed capital because someone has an idea that could be great if they just get some money. Only someone who knows you — and who actually knows you very well – is likely to give you seed capital. Strangers and outside investors need to see proof that you have a good concept that merits their investment. You still need a plan for your "insiders" but the requirements are diminished by how well they know you and yet again by how much they love you. Outsiders are not your target for seed money.
The Golden Rule At all times, treat your friends & family with the same level of respect that you would treat any outside investors. That means you want to have a strong business purpose, have a good plan, ask for an appropriate amount of money and offer a fair return in exchange for any investment.
Plan your Business It's critical that you plan your business concept before you speak to anyone about asking them for money. That doesn't mean that you have to create an investment grade business plan complete with financial statements, documents and details, but you do have to have a good outline of what you're going to accomplish and how you plan to do it. You'll need this because it creates credibility with the people who you're calling on. Even though these people will not "rake you over the coals" in the same way that a stranger would, they still want to know (and they deserve to know) that you are thinking clearly about exactly what you want to accomplish.
Please look for the next segment on Wednesday, October 22, 2008.
About Joel G. Block
Well known in the business community, Joel Block is a best selling author, speaker, and business strategist. Frequently a principal in his transactions, Joel has raised tens of millions of equity dollars for his ventures, which have included real estate syndications and privately held businesses.
Joel’s career is highlighted by the launch of a financial publishing company which he grew nationwide and later sold to the Los Angeles Times. More recently, Joel works with scientists, engineers, technologists and others to help them optimize their entrepreneurial opportunities. Would you like to get a private phone consultation with Joel? Visit www.joelblock.com/capital for details.
Also, be sure to check out our newest project: a blog to organize the blogs that cover entrepreneurship: http://www.entrepreneur-hub.com
Go Out And Stake Your Claim!
P.S. To discover how to gain capital to grow your business exponentially
please click here ==> Business Capital Movies
Filed under Business Financing, Business Growth, Raising Capital by Joel Block
Comments on Raising Capital From Friends And Family (Part 1 of 3) »
Thanks for laying out the important points so clearly, in such an easy to follow process, Joel. I was also wondering how to go about it with the next level away from oneself - private individuals or groups who are looking for something to do with a big wad of cash, but who don't know you personally and are also not really venture capitalists.. What must a business plan look like for these people? What else would be essential in dealing with them?
Nicole's question is a good one and I get it often. The investors she describes are commonly referred to as "Angel Investors" and the money she'd raise would be an "Angel Round". True Angels are in it for the adventure and for a chance to help the entrepreneur, as well as having an eye toward smart investing. There are other sources of capital in the period of "Post-Friends& Family" but "Pre-Venture Capital", but Nicole asks about Angels, so let's stick with that.
How do you learn how to approach Angels with an appropriate business plan, a due-diligence package and a Powerpoint pitch? First recognize that the Angel "audience" is different from, and requires a different approach from, friends, banks or venture capitalists. You should ask a trusted business advisor, such as Joel, to help you get to know appropraite Angel groups and how to prepare for them. Another good learning source is an "incubator" program. Ask at your local colleges, universities, local govenrnents or Angel groups themselves. I volunteer a sizable chunk of my time (I'm a corporate lawyer for entrepreneurs and privately-held buisnesses) to incubators and other enterepreneur groups. Also ask your local "Small Business Development Center" (SBDC's are funded by the federal Small Business Adminitration). A third, and obvious source, are the Angel groups in your area or industry. The Angel group that I most often assist holds monthly "boot camps" for entrepreneurs having the questions Nicole has. These one-day sessions help the entrepreneur understand the Angel process and how to prepare the right documents and presentations.
hope this helps…
Treating them with respect and giving a fair return is obviously a good idea - but there's another important reason for documenting your plans with a Business Plan: there's a good chance that a probing question someone asks can greatly improve your Plan. They will may well point out something you missed …
Bottom line: if your idea is good people will be falling over each other to give you money. And if they're not giving you money yet, maybe you're not communicating what you're going to do for them clearly enough yet.
Thanks for your observation. Very well put. Great ideas get bigger with every person who touches is. So share your ideas with people you trust and get ready for the explosion of brain power to occur!