We’ve discussed previously on this blog how fewer than 1% of founders who seek venture capital financing actually get it during a startup’s earliest stages. The vast majority of founders instead look to their friends and family to secure initial funding. Investors from a founder’s inner circle bring a unique added value to the table, and here we’ll explain both why they’re essential to a successful crowdfunding campaign, and strategic ways to encourage their participation.
They Build Up Your Social Proof
Statistically speaking, the most successful crowdfunding campaigns share a common element: the founder’s closest people have been involved since day one.
When the time comes to spread word of your company, friends and family can do it like no other. This can take on many forms: sharing/liking/commenting on social media, campaign launch parties, and of course the grassroots, word-of-mouth testimonials within their networks (and their networks’ networks).
All of the above create what is referred to as “social proof,” the empirical evidence that helps convince newcomers that your idea is legitimate and worthy of their investment. Strangers who come to a campaign page with $0 pledged will simply skip past it. Just like people are reluctant to eat at a new restaurant with no customers inside, they hesitate to invest in projects with no visible backing.
The Best Way to Approach Friends and Family for Funding
Asking friends and family to invest in your startup can easily be taken for granted. The familiarity you share also makes it more likely you’ll have a receptive, and ultimately cooperative, audience. This is exactly why you should proceed with the same—if not greater—formality and courtesy that you would with strangers who invest.
Because you’ve already earned their trust, your closest allies can easily misperceive the risk associated with their investment. Accordingly, they won’t always subject you to the rigorous vetting that banks or venture capitalists would, nor require strict terms for repayment.
Keep the following five pointers in mind when you ask friends and family to invest:
- Have an understanding of what type of deal you seek.
- Hold a formal meeting to pitch (explain) the business.
- Provide a professional business plan.
- Provide any product or service information, supporting information, or due diligence relevant to the business.
- Use formal documents to memorialize the relationship.
You may also consider running an official Friends and Family round of financing. F&F rounds can provide key early traction for founders who have properly leveraged their closest relationships, while enabling preferred terms for your closest supporters.
They Probably Want to Help You Anyway, So Let Them
As Tetsuro Miyazaki of Dutch tap water company KRNWTR states:
“If not even your friends and family will invest, who is then going to invest in your company?”
Your friends and family want to help, and if you truly believe in the opportunity you’re selling them—it’s a win/win. You get key early traction, and they get the chance to grow their money with an early stake in your fast-growing venture.
Questions about launching your venture and/or how to utilize equity crowdfunding? We’ll be happy to support you!
