Start-ups need capital. It takes money to start, operate, and grow a business. While there are intelligent ways to create and stay lean, it can often take more than you think. Most of the common reasons companies fail and go out of business can be directly traced back to not having enough cash.
Startup Fundraising: What is A Friends And Family Round?
A friends and family round of funding is the earliest start-up capital your company will bring in. It may or may not be named as your pre-seed round. This is usually a more informal round. If it’s structured more professionally, the better and easier future rounds will go.
This round is all about your network. It may include close immediate family, extended family, relatives, and friends. They may be childhood friends, former classmates, previous coworkers, or bosses and professors. They can also be people you are introduced to through these personal contacts.
Don’t dismiss this round because you don’t believe your friends and family aren’t rich. They don’t each have to contribute a lot of money. Sometimes, the principal and side benefits are more valuable than the actual amount of capital raised. So, figure out how to ask your family and friends to fund your start-up.
What’s so important about an F&F Round?
It’s The First Stepping stone
This round is your first stepping stone to building your business idea and obtaining more capital from other investors. It is one of the best signs of credibility for future investors. When it comes to funding early-stage start-ups, the decision mostly comes down to believing in the founding entrepreneurs. If those who know you best aren’t willing to bet on you and invest in you, that may be a red flag for other investors. The opposite is also true.
Get Going Fast
Speed is essential for start-ups. This round cannot just provide finances for the basic setup but to help you go fast enough to make it all work.
Proves Your Ability To Sell
For a start-up business idea to succeed, the founders and key team members must be able to sell. They must be able to sell the product, idea, company, and vision. How will you sell your idea to anyone else if you can’t sell this group? Success in this round is a positive for future investors.
The Benefits Of F&F Funding Rounds
There are many advantages of starting with friends and family rounds for financing your startup. In addition to credibility and the benefits already mentioned, there are further benefits too:
There are many ways to structure these rounds. Though done well, it can be a form of non-dilutive funding, which means that you can preserve more equity for recruiting professional advisors, key team members, other cofounders, and raising sophisticated capital.
Faster & Easier
This can be the fastest and easiest money to raise for your start-up. While it is also an excellent opportunity to hone your professional pitching and presentation skills, close connections aren’t likely to be nearly as tough as professional investors.
This can help you avoid lengthy detours and distractions, preserve your edge in the market, and make moves faster. Hopefully, it also means much better financing terms than if you went to a bank or VC firm and more slack should you run into issues.
Strength For Future Funding Rounds
You can go longer without bringing in outside capital by raising this money. This is the chance to establish and prove your idea and develop the assets and metrics to make you more attractive to other investors.
In turn, you’ll be negotiating from a position of strength and will have more power in dictating the terms you want from the investors you wish to for your Seed and Series A rounds. This is why you should work out how to ask your family and friends to fund your start-up.
The Cons Of F&F Rounds
There can be potential risks and downsides to these rounds, just like any other. It comes down to who you allow in and how you structure it, communicate expectations and boundaries, and protect yourself and your business from risks.
Your relationships with friends and family are probably more valuable to you than any amount of money or a job or company. Be sure to set expectations well and not take money that could cost you these relationships.
Be careful how you structure these rounds. How much, if any, control do you want to give up to these investors? If their vision or situation changes, they could hamper your product and vision plans. Or even make it difficult to bring in more investors or sell your business in the future. You want to preserve stock and equity, especially institutional investors, and form employee stock pools in bigger rounds.
How To Ask Your Family And Friends To Fund Your Startup
Develop Your Idea
Make sure you have absolute clarity on your idea and vision. Especially when soliciting financing from this group, make sure you are genuinely committed. It should be something you can commit to for the next ten years. No matter how hard it is and what sacrifices you need to make to return their investment.
Understand Your Funding Need
Know how much money you need to raise in this round to make it viable. How much will it take to get through to the following milestones? It is better to ask for more to make it to the next round than to run out of money and lose their investment. Also, understand what you can afford to give up for this money.
Understand Their Motivation
What are their triggers and motivations to invest in this with you? Is it to help you because they like and love you? Are they also passionate about the mission you are on and its potential impact? Or are they just investing for the financial return or do not want to miss out on the opportunity? This will all help you get everything else right when you make your ask.
Create Your First Pitch Deck
Would you like some detailed information on creating a compelling pitch deck? Our team at IQ can help you with this. It is time to put all of this together in your first pitch deck. At this stage, you only need around 8–12 slides. Use this process to get more clarity on your business. You can utilize existing pitch deck templates to speed things up.
Startup Talking & Pitching
Start talking to your friends, family, and other contacts. Begin sharing your ideas. This can be happening well before you have your pitch deck polished and are ready to bank the money. Build up to it. Then go through an actual pitch with them. Practice first. Pitching in this round will help you improve ahead of pitching to professional investors.
Learn More About Raising Investment for your Canadian Start-up
Investor Quotient Canada is a premier professional services firm offering a suite of business, legal, logistical and related services to foreign innovators and entities looking to establish and/or expand their operations into Canada or invest in Canadian businesses.
IQ works with start-ups at all stages and welcomes an opportunity to speak with you about any of your start-up needs, from helping to develop the concept to raising the necessary funds to move forward. Contact Upasana and book a consultation.