How to Raise Seed Funding from Friends and Family
I frequently get asked by new founders” How Do You Raise Seed Funding from Friends and Family”? Getting seed funding from friends, family friends, and just plain family is incredibly common for companies just getting started. However, I know how awkward it can feel to approach these family members and friends and pitch your idea. One of the most important things is to share your enthusiasm for the company or product. Provide as much detail as possible and most of all do not be discouraged if they do not decide to invest. In reality, few will invest at this stage. It is not a reflection of your abilities or product since you do not have intimate knowledge (usually) of someone else’s financial situation
Regardless trying to raise seed funding from friends and family will be good practice for you pitching your company …besides, I can guarantee I’ll be much harder on you than your Grandmother!
When you have a new business venture that you want to get started, it can be tough to convince traditional investors to join an initial funding round. Because of this, startups will sometimes turn to friends and family first to raise some initial capital. Surprisingly, 38% of startup founders report raising money from their friends and family.
Sometimes known as a pre-seed round, the friends and family seed funding round is a great source for a startup to get through its first few months of operation to bring on initial employees, secure an office space, and purchase key resources needed to become operational. As the name states, the round usually taps people a startup team knows like friends, family, and immediate connections instead of investors to fuel the round.
It’s often said not to mix business and family, and this is why it can be challenging to approach those close to you looking for money, but a friends and family seed funding round can be a great start for a new business and there are ways to approach this initial seed funding round in a way that can be rewarding for those investing and gets you the money you need. We’re diving into the things you need to know and how you can get started.
- Schedule “Catch-Up” Meetings
- Always Be Pitching
- Don’t Be Afraid to Make the Ask
- Think Outside the Box
- Pave a Path to Investment
- Be Transparent
- Make It Clear That It’s Ok Not to Invest
- Make the Time
- How Much Capital Should You Ask For?
- How To Make Sure Your Don’t Over-Dilute Your Equity
- What Do You Offer Your Friends and Family for Investing?
- How Do You Manage The Relationship Between Your Friends and Family Investors?
- How Do You Know When To Buy Out Toxic Investors?
It may seem difficult or awkward to approach people you know to ask them for money to help your business, but there are a few things you can do to make it a better experience for yourself and them.
We all know that fundraising takes a lot of time and energy—you’re essentially selling your business idea to anyone who may be interested in investing. You’ll want to start by warming up anyone you think may be interested in investing with a catch-up meeting to get them up to speed with where they are in their lives (to find out if they even have the ability to invest) and to update them on your business (to find out if they may be interested in your idea). At this point, you might throw out the idea that you’re fundraising for, but you don’t necessarily ask for the capital—it’s ok to reconnect, warm up your potential friend and family donor to the idea, or even ask if they may have others in mind that you should be talking to.
While you may not be ready to ask for capital right out of the gate, you do always have to be in the mindset of a pitch when you’ve decided to approach friends and family for a round of funding. Have your pitch deck or one-pager ready, along with a few lines prepared about how your idea will change lives. This is your opportunity to get people excited about your business, even if they don’t end up being investors. Your deck and your elevator pitch should focus on value and results—what you can do for others by getting your idea up and running.
It may be intimidating to ask for money, but especially when it comes to the friends and family round, you need to be obvious. People that don’t invest for a living may never even think about the possibility of being an investor until they’re flat out asked. Make sure to point out that your current round is specifically an opportunity for friends and family, and that:
- They don’t need to be super-rich to invest,
- An investment this early could be a huge value for them in the future, and
- They’re not just investing in the business idea, they’re investing in you and your passion.
A friend and family seed round doesn’t need to be the formal process that traditional investing is—it’s ok to approach a potential friend and family investors in a more casual way to ask them for an investment. Have a group over for a wine and cheese night or a fun Sunday brunch, or take them out for a fun night out on the town with the caveat that you’ll take a few minutes to introduce your new business venture. Making things less formal will not only keep things more comfortable but allow your potential investors to interact with each other and possibly even hype each other up.
After you’ve set the stage, it’s time for a formal plan to get anyone who is interested in learning more to take action. You may want to have a pitch deck or other materials that people can take with them to mull over their decision but also you should be ready with a contract ready to sign if someone is interested.
It’s likely that your friends and family have never invested in a startup business before, so they may not know the risks. It’s important to be transparent from the get-go about the risks involved in investing in a new business and that they may not recoup any of the money that they put in despite how hard you will work to make the business a success. This level of transparency will give you a higher chance of keeping your relationships intact despite what happens in the long run.
Of course, you know that you shouldn’t pressure anyone to invest in your company, but you should also make clear to them that it’s really ok if they’re not comfortable investing. Sometimes people need the reassurance that they shouldn’t invest out of guilt. Make it clear that you’re presenting them with an opportunity and it’s fully their choice how they want to proceed.
Finding investment takes a lot of time and energy, especially at the early stages. It’s important that as a founder, you understand that in addition to running your business, it’s going to take all the rest of your time and energy to network, shmooze, and fundraise. Be patient, but persistent, and you will be able to reach the goals that you want to for your startup.
Of course, it’s easy to say “ask much as possible”, especially when you’re just starting out on building your business, but you need to remember that’s not what the friends and family round are for. Seed funding from friends and family is designed to kick start your company, so to understand how much you should ask for you need to understand how much you need. This is called your “Runway”. Be strategic—build a budget plan for the initial six months or so of your business and determine what financing you need to get yourself started and through that predetermined period of time. By understanding your basic needs, you can be straightforward about why you’re asking for a certain amount and you have a baseline to measure against as you grow. When looking at the numbers, the average amount that friends and family invest is on average $23,000, and they invest the most money in startups in aggregate, investing over $60 billion per year.
It’s of utmost importance, especially early on in a startup, to plan for a cap on equity to make sure you won’t be diluted early and allows for easier investment during later fundraising rounds. To learn even more, I wrote an article about anti-dilution for founders click the link to check that out. However, to sum it up, you want to make sure to prevent is broad, unwarranted, or unfair dilution. A few best practices to achieve this is to:
- Organize Your Equity: Before offering equity, make sure to organize a cap table with benefits including what your dilution will look like with real numbers.
- Use The Law to Your Favor: Make sure one of the first things your new startup retains is the invaluable services of a lawyer. A lawyer can make sure that you have the right contracts and term sheet in place so you know when to make arrangements and when you should push back.
- Bring on Invested Investors: Equity is a key driver for employees, and for future investments, so you have to be mindful of the type of stakeholders you bring into the mix.
Investors have a lot to consider when making the decision to hand over money to a founder and business. However, unlike traditional investors, friends and family investment isn’t always straightforward in what is offered. A few options include:
- Loans: An option planned repayment or repayment with interest-based on an agreement. This could also mean convertible loans, which may convert to equity in the future.
- Gifts: An option that you don’t have to pay back, based on a formal agreement put in place.
- Equity: An option where an agreement is made where someone becomes a more formalized and active investor whose financial outcome depends on the outcome of the business.
From the first formal investment, it’s of utmost importance that every involvement in your business is officially and thoroughly documented. You’ll also want to regularly and transparently update your friends and family investors to keep the relationship solid and to communicate progress.
Of course, the ideal situation would be to avoid toxic investors in the first place. A few types of investors to avoid include those that will be overly and hurtfully involved in your business, those that are just driven by greed and money, not for the business idea, and of course, loan shark types of investors who ask for personal guarantees or collateral to secure a seed investment.
If you do happen to bring on a toxic investor, you will have the option of buying them out at a point in your business, so you might have to be patient as you get to the point to where you can pay out the investor’s equity.
Securing seed funding from friends and family can be a true lifesaver for a startup, but make sure to have all the right pieces in place before taking the money. Make sure the investors are aware of the risks and be educated on your risks as well. Check out our article that outlines the top 13 questions to ask investors before accepting a check to make sure your investors align with your business and your needs.
If you’re looking for more tips, advice, and guidance on how to grow your startup, check out some more of my blogs at jonathanhungvc.com. You can get invaluable insights into the world of angel investing and more.
About the Author
Jonathan Hung is one of the most active angel investors in Southern California, his mission is to drive value creation within each portfolio company. In support of this mission, he serves as Co-Managing Partner at – Unicorn Venture Partners.
Jonathan and his team target investments in US companies that have global market potential with a focus on long-term growth expansion to East Asian markets.
Jonathan developed his investing prowess as a Managing Member for his family office fund, J Heart Ventures, which made investments in start-up companies such as Gyft, ChowNow, Miso Robotics, Clover Health, Bitmain, to name a few startups he funded.
Jonathan has various degrees from the University of Southern California, London School of Economics, Massachusetts Institute of Technology, and The Wharton School at the University of Pennsylvania