If you can’t finance your venture out of your own pocket, you’ll most likely turn to those in your close personal circle. However, if you do go this route, you better be damn sure you aren’t going to fail, because there’s nothing like the feeling of going back to your Dad, Uncle Larry, or longtime family friend and asking them for more money (or worse, telling them that you just blew the $50,000 they just gave you).
When raising money from friends and family, it’s important to understand that it can often create personal and emotional issues that go well beyond your business judgment. If you borrow and subsequently burn through the thousands from Uncle Larry for your innovative start-up, don’t kid yourself; he’s going to want to see something besides your pretty face at Thanksgiving dinner. Can you say awkward? Conversely, if you have an informal agreement with him or someone else and you strike it rich, this could lead to some uncomfortable legal drama down the road.
“What’s money for anyway? It’s to make things happen”, once said Auntie Joyce, maverick entrepreneur Richard Branson’s aunt. In 1972, she lent $10,000 to Sir Richard so he could build a recording studio, which eventually became Virgin Records, and decades later, a $20 billion empire.
When picking this path, it’s important to exercise the same discipline as you would in dealing with a professional investor. Firstly, treat family and friends as if they were strangers, insist on some sort of official agreement between you and them. Secondly, you should only borrow from those who have a disposable amount to lend. Sounds like a duh, but many people don’t know how to say “no” to a loved one and wind up leveraging their futures on your new “can’t fail” concept.
In addition, debt may be better than equity. If someone lends you money, you only have to pay it back with interest. If they insist on buying stock in your company, consider making it nonvoting stock (so they can’t tell you how to run your company). Lastly, after you’ve taken their money, make it a priority to fulfill their expectations by giving them a maturity date for their invested money and do everything possible to pay them back in a timely manner (with hopefully a solid ROI). Don’t discount constant communication either. Keeping all investors highly informed is very important, and it helps prevent angry phone calls and awkward moments when things aren’t going exactly to plan.
Kick-starting your dream by taking money from those who you trust can save a lot of time and energy looking for external investors. It can also be just the right motivation to keep your eye on the grand prize, because nothing feels better than being able to write your Dad (or Uncle Larry) a check for ten times what he gave you to follow your dreams. Besides, getting rich with your friends and family makes it that much better, because who are you going to go on vacation with if you’re the only one who can pay for it?
Excerpt taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital. In the coming weeks, we’ll be posting even more insightful nuggets from this paper. However, if you’d like to read & download all 33 pages of constructive prose right this moment, it’s sitting on our website: www.dontgosouth.com.