Here's a script to help you ask for startup money from friends and family in the least awkward way possible
Summary List Placement
Asking your friends and family to invest in your business is fraught with the potential for melodrama. Unlike the kind of analysis that comes with a bank loan, when you borrow money from your loved ones, you invite a special kind of scrutiny. Suddenly, your dad has license to question whether or not you really needed that new desk lamp, and your doting grandmother might wonder aloud why you turned her nest egg into a third website redesign. Still, the fact that founders so routinely turn to friends and family loans — despite the messy strings and relationship complications — is testament to their value. No one will give you more money, on better terms, with less requirement of proof than your family. To make the conversation a little easier, Business Insider spoke with a number of founders who have successfully raised friends and family funding. Below is a list of the most pressing considerations to bear in mind when pitching your loved ones, as well as a script that any entrepreneur can use for seed-stage fundraising. Acknowledge the risk of their investment One of the main reasons founders turn to friends and family financing is because, generally, the money comes with very few strings attached; your armchair investors are either getting equity (a percentage of ownership in the company) or the promise of a recouped payment — if the young company is an eventual success. These kinds of lending conditions are extremely favorable to the founder, which is why so many entrepreneurs turn to friends and family financing first. However, the vast majority of startups fail within seven years, meaning most friends and family rounds are financing companies that will eventually die. Founders and those familiar with the startup environment understand these risks, but most people do not. So, before anything else, make sure that your potential investors understand the risk factor of investing in a startup. In a text message he sent to prospective friends and family investors, Andrew Luong, a cofounder of Doorvest, spelled it out clearly: "Early stage investing is risky and often goes to zero." Frame the pitch as an opportunity, not a request If you are offering investors equity in exchange for cash, then you can frame their support as a form of seed investment, in which a small amount of money now can translate to a huge payday in a few years. Very few people get an opportunity to invest in a startup on the ground level, a point Luong emphasized to his friends and family when pitching. Normally, only institutional investors have the resources to inject cash into a small company, because they have established the pipelines that enable them to seek out, research, filter, and then invest in promising startups.
For that reason, Luong and his cofounder Justin Kasad underscored the fact that they were offering their friends and family a rare opportunity. "Yes, it was technically an investment into Doorvest, but the angle that we were pitching was more about giving them exposure to early-stage startups, or angel investing, which is something that we believe is an awesome class that most people don't have access to," said Luong. Luong and Kasad were able to raise more than $100,000 in family and friends funding, before then approaching institutional investors, according to a spreadsheet viewed by Business Insider. The Doorvest founders were confident that they would receive venture capital funding, so their friends and family outreach served mainly to give their loved ones a valuable financial opportunity. In this way, framing their outreach as an opportunity helped shift the psychology of the exchange, making it feel less like an obligation and more like a gift. Be professional, it's time to practice your pitch Treating your friends and family investors professionally accomplishes a number of things. First, it will increase the likelihood that they'll invest. According to Matthew Dailly, the managing director at Tiger Financial, your preparedness indicates that you are serious about your work, and it shows family members that you have put a significant amount of thought into the project. "If they see that you are passionate about this project and could make revenue from it, they will trust in it too and potentially share that passion," said Daily. Dailly also says that your friends and family round is the perfect time to test out the pitch deck and presentation you plan on using with professional investors. This way, you go through the work of putting together all your resources, and you get a practice audience that will be much more forgiving. In addition, treating the process as a professional opportunity helps keep it separate from your personal life. This is especially helpful when a family member declines to invest, because you understand that they are passing on a business opportunity, not on you. Be specific about how much, how you'll use it, and how you'll pay it back Laying out exactly how much money you want to raise, what you plan on doing with that money, and how you plan on paying back your investors all make your request feel more actionable. Alex Tran and Kim Nguyen, cofounders of Seattle-based Rain City Cleaners, raised $32,000 from their friends and family. They also explained clearly how their investors' money would be recouped. "We wrote a contract that stated we would return their money plus 1% interest," said Tran. "This was much better than us going to a bank and getting a business loan. There is no deadline for us to return the borrowed money."
Likewise George Pitchkhadze, the chief marketing officer of the vegan food service Thrive Cuisine, laid out the specific sum he was seeking for his business in the email he sent to family and friends. "The sum I'm looking to raise is $18,000; no more, no less," wrote Pitchkhadze. He received $18,330 in funding. Friends and family investment script: Dear (name), For the past (amount of time), I have been working on building (company name), a (sentence that succinctly and specifically describes what your product or company does). In recent months, we have seen a number of encouraging signs of consumer interest. Our product has (insert applicable success metric, such as: been downloaded X number of times, accumulated X number of page views, generated X number of sales, increased revenue X%, driven X amount of engagement on social media, earned X amount of media coverage). To capitalize on this growing momentum, our team has decided that it's time to take this project to the next level. In the next six months, I want to: (list of items you will use the investment money to accomplish, such as: launch an official website, hire a marketing agency, lease a storefront, buy raw material in greater volume, etc.). By taking these steps, (company name) will be able to (insert quantifiable success metric, such as: "become the most popular dog-walking app in Portland," "generate $50,000 in sales by the end of the year," "capture 100% of the marijuana delivery market in the Lakeview neighborhood.") To do that, I am inviting you to invest in (company name). I am looking to raise (amount of money) by (amount of time). All investors will receive (a percentage of equity in the company; a promissory note pledging the full recoupment of your investment; a full return on their investment plus 2%; a percentage of net profit for the next 5 years; etc.). Please note: As with all early-stage investment, there is a possibility that you will lose this money. Please consider this reality when determining what amount to invest. Otherwise, if you're interested, please reach out over email so we can start working together. I am also happy to send over my complete pitch deck, which includes a financial breakdown, competitive landscape analysis, list of my team members, and a roadmap for my product. Thank you for your time, and I look forward to hearing from you. Sincerely, NameSEE ALSO: How to Get Funding From Friends, Family, and Fools SEE ALSO: These startups will lend to you — just so long as your friends and family commit too Join the conversation about this story » NOW WATCH: How NASA strategically paints its vehicles for space
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Investors and founders reveal how to know if venture capital is the best way to fund your startup, and what paths to take if it clearly isn't
Summary List Placement Successful entrepreneurship is about knowing the best way to fund your business. Raising...Summary List Placement Successful entrepreneurship is about knowing the best way to fund your business. Raising venture capital isn't always the answer. Venture capitalists say the most important factor to consider is market size: How big could your company get? Ultimately, venture capitalists want a big return on their initial investment. Click here for more BI Prime stories. If you're thinking about raising venture money for your startup, you should start by asking yourself one question: Is this business appropriate for a venture capitalist's investment? Too many founders answer "yes" (if they bother questioning the wisdom of raising venture capital at all). It's part of how high-profile companies like Amazon and Google achieved success, the thinking goes, so it must be advisable for every startup. And yet, in blindly pursuing venture capital, these entrepreneurs are setting themselves up for a series of rejections (or a difficult partnership with an investor down the road). That's because venture capitalists look first and foremost at a company's potential market size. If yours isn't large enough, they won't want to work with you. The economics have to make sense for a VC to invest in your company David Rose, who runs Gust, a digital platform for early-stage entrepreneurs and investors, previously told Business Insider that a venture capitalist's decision comes down to numbers. If, say, you're bringing in a maximum of $1 million a year in revenue, "it may be a great, wonderful, much-needed business," Rose said. "You may be doing the world a favor, or you may enjoy it and support your family. You may be able to make a fortune yourself and take vacations." But, Rose emphasized, the economics of a business that brings in $1 million a year in revenue "are just such that there is no way that you can get an investment from me at any reasonable number for that to make economic sense." Rose's approach to investing is hardly unique: Investors expect outsize returns on their money. Sometimes it's even a large multiple of what they put in. If your startup is generating revenue in the low millions, or if the likely exit price is in the low millions, a venture capitalist has minimal incentive to support you. That's especially true because venture capitalists are well aware that most of the companies they back will fail. In fact, they generally make money only from the sliver of portfolio companies that are wildly successful. Market size is the most important factor in a VC's decision to invest Take it from Scott Kupor, a managing partner at Andreessen Horowitz, the venture-capital turned financial-services firm that invested in Facebook, Airbnb, and Lyft. Kupor previously told Business Insider, "For a venture capitalist who knows that they're going to be wrong a lot of the time, they have to figure out what's the likelihood this company could be in that upper-right tail of returns," the small number of companies with the highest return on investment. Kupor went on: "When we're doing an early-stage investment, what we're trying to imagine is the 'what-if' question. 'What if this company worked? What could it look like? How big could it be? How much revenue could it generate? Ultimately, what could the equity value be?'" Then Kupor considers, based on what he knows about the company, "What do I think the likelihood is of that happening?" Read more: Founders and investors reveal the ultimate guide to scaling a startup — and common pitfalls to avoid For entrepreneurs, that translates to one all-important consideration. In his 2019 book, "Secrets of Sand Hill Road," Kupor said anyone raising venture capital should be able to convince themselves and their potential investors that their business is able to bring in several hundreds of millions of dollars a year in revenue over the next seven to 10 years. That means you could reasonably take your company public at a market capitalization of several billions of dollars, Kupor wrote. Which, in turn, means "the returns to the VC on this investment should be meaningful enough to move the needle on the fund's overall economics." A business doesn't have to be a 'unicorn' to be successful Venture capitalists typically invest in companies they believe can be grown aggressively. That may not align with your financial plans or ideology, especially since such bargains frequently give investors a degree of power over the companies they invest in. Samara CEO Salima Visram previously told Business Insider that she decided her sustainable fashion brand, which makes small batches of clothing and accessories out of environmentally friendly materials like apples, would clash with the expansionist goals of venture capital and be better off bootstrapped. She was prompted by several friends in the startup world who told her horror stories about how they lost control of their companies after investment deals. Read more: How a founder bootstrapped her fashion startup to a profitable $2 million in revenue with bags made of apples and no investors "A lot of it is growth-at-all-costs," Visram said. "For us, we want to be conscious." Visram's smaller brand may not have the vast resources of a venture-backed early-stage startup, but keeping costs down has made Samara profitable "since day one," Visram said. To reiterate what Rose said, if you aren't positioned to become the next Google or Facebook, that doesn't necessarily mean you're not building a successful business. It means your company may be a "lifestyle startup," which doesn't require venture capital and probably won't ever be a "unicorn" worth $1 billion. Read more: The founder of a billion-dollar startup says you need to nail 'message-market fit' if you want to raise millions from investors In the book, Kupor mentions smaller venture capital funds and debt financing from banks as two paths to raising capital without traditional venture-capital money. (You can also bootstrap your business, using personal funds and money from friends and family.) Perhaps the most important takeaway here is to clarify your personal definition of success. You don't have to build a unicorn to get there. Angela Lee, the founder of the venture-capital firm 37Angels and a professor of professional practice at Columbia Business School, previously told Business Insider that a lifestyle startup could easily bring in $10 million a year. And, Lee said, "since when did making $10 million a year become a failure?"SEE ALSO: How to know it's the right time to launch your business, according to a former Amazon VP who just raised $4 million for her skin tone-matching beauty startup SEE ALSO: How a 32-year-old first-time founder raised a $3 million seed round by asking investors about their sex lives Join the conversation about this story » NOW WATCH: Here's what it's like to travel during the coronavirus outbreak
Veteran VC Steve Jurvetson says he rates startup founders highly if they're like his long-time friend Elon Musk: They have "20-year vision.''
Steve Jurvetson, a venture capitalist who is friends with Elon Musk, was an early investor in...Steve Jurvetson, a venture capitalist who is friends with Elon Musk, was an early investor in both SpaceX and Tesla. Jurvetson, who left the firm Draper Fisher Jurvetson in 2017 after he was accused of sexual harassment, co-founded his new firm, Future Ventures, in 2018 and launched a $200 million fund in 2019. On Monday, the VC appeared on the podcast, The Twenty Minute VC, to talk about his friendship with Elon Musk, as well as what VCs look for when they meet with pitching founders. Here's what the VC looks for in potential founders. Visit Business Insider's homepage for more stories. Steve Jurvetson, a venture capitalist and long-time friend of Elon Musk, was an early investor in both SpaceX and Tesla. They've known each other for 24 years. On Monday, the VC appeared on the podcast, The Twenty Minute VC, hosted by Harry Stebbings, to talk about his friendship with Musk, as well as what he looks for in founders when they're pitching for funds from investors. Jurvetson had previously told Business Insider that he asks potential founders what the company will look like in 20 years. It's still his benchmark, and he explained further. "We want to invest in visionary founders," the VC told Stebbings on the podcast. By asking founders about their 20-year vision, Jurvetson said, he can weed out founders who are simply looking to cash out. The VC said he looks for founders who are committed to their company for the long haul, and who have 20-year visions that are "more rich than anything they pitched." "You want someone who is so deeply tied to their mission that they don't think about sort of the common logic of what's the best financial decision in the moment," the VC said. As entrepreneurs start crafting a vision for their company, Jurvetson said, those founders should take a page out of Elon Musk's playbook and launch "risky, save-the-world companies." The VC said Musk has an ability to focus on what's important at the moment, while still keeping an eye on the company's long-term vision. Jurvetson said that if you had asked Elon Musk about his 20-year vision when he founded Tesla in 2003, the CEO of Tesla would have said that in the future, every vehicle would be electric, "not just cars, but buses and boats and trains." Electric vehicles have the potential to save Earth and its citizens from suffering from the CO2 emissions that result from burning fossil fuels, Jurvetson said. Building an electric car was just the beginning. Jurvetson said that Musk's founding vision for SpaceX was not simply building a rocket, but colonizing Mars. "Arguably it's a tough thing to pitch when you haven't yet built a rocket," the VC said, referring to Musk's ambition to colonize another planet, "and, yet that's really where his mind is at from the beginning." The VC said his eyes are peeled for founders who will go down in human history if their startup idea succeeds. "If SpaceX achieves its mission, humanity becomes a multiplanetary species," the VC said. "This will go down in the greatest hits of evolution, like the opposable thumb and like the neocortex." Jurvetson, who left the firm Draper Fisher Jurvetson in 2017 after he was accused of sexual harassment, co-founded his new firm, Future Ventures, in 2018 and launched a $200 million fund in 2019. The VC currently sits on the boards of Tesla and SpaceX. He took a leave from Tesla's board from November 2017 to April 2019, when it was announced that he will step down from the board at Tesla's 2020 Annual Meetings of Stockholders, which is slated for September 20, 2020, per Tesla's SEC filing. Jurvetson, who also took a leave of absence from the SpaceX board following accusations of sexual harassment, will continue to serve on the SpaceX board, as TechCrunch previously reported.SEE ALSO: These two VCs were hobby Bitcoin miners a decade ago, and now they've raised $110 million for a second fund focused on cryptocurrencies and blockchain startups SEE ALSO: PITCH-DECK LIBRARY: Search through over 150 pitch decks that startups including Uber, Postmates, and Airbnb used to raise millions Join the conversation about this story » NOW WATCH: How 'white savior' films like 'The Help' and 'Green Book' hurt Hollywood
American venture capital and private equity is dominating Africa, but it’s mostly funding other white foreign...American venture capital and private equity is dominating Africa, but it’s mostly funding other white foreign founders as black entrepreneurs struggle to raise financing“Sorry for asking, but do you understand that the money belongs to the company and is not your personal fund?”When Jesse Ghansah saw this question in an email from a prominent white investor in San Francisco while fundraising for his first startup four years ago, he refused the deal. Continue reading...