After initially investing personal funds for a new business venture, entrepreneurs
will often resort to their next option for raising capital, namely their family
and friends. However, this may not be as easy as it sounds. An entrepreneur
seeking startup funding cannot simply ask their family members and friends
for large amounts of money. Instead, the correct way of going about asking for startup funding is by developing
a business proposal and presenting it to the family members and friends whom they
are planning to ask. By being prepared in this manner, the entrepreneur will be
able to gain credibility from others and show just how serious they truly are about
their business ideas.
Making a list
Most entrepreneurs initially believe they do not have many family and friends to
ask for startup funding. However,
once they compile a list of all relatives and friends, they will be able to see
that they actually know more people than they had initially thought.
At this stage, the
entrepreneur should not limit the list to those that s/he thinks
will be the most likely individuals to invest capital in the new business. Therefore,
they should brainstorm with close family and friends on devising a list themselves.
This list should include the names of acquaintances and friends they can think of
in the present and past. By creating a list and asking others to make one as well,
the entrepreneur will increase the number of contacts who could be
potential sources of funding.
Organization of the list
In the list of names, the âinner circleâ should include those with whom the
entrepreneur
has the closest relationship. This can comprise of parents, in-laws, uncles, aunts,
grandparents, and best friends.
The middle tier should consist of people with whom the
entrepreneur has had a bit
more distant relationship with but whom they have regular association with. The
âmiddle circleâ of acquaintances can be neighbors, delivery people, attorneys, and
friends of friends.
The outer layer of the circle should include names of people that the entrepreneur
has not kept in touch with over the past few years but has shared a close relationship
at one time with the
entrepreneur. These people can be past business partners and
associates with whom they still have a good standing relationship with.
Narrowing the list
Once a list is compiled, the next step in approaching family and friends for capital
resources is to narrow the list. The need to narrow a list is necessary since it
will only include people whom the entrepreneur knows have the proper finances to
make such an investment. Each name should be weighed according to the personâs accountability
since it would be pointless to ask individuals who have no money or who are distant
in relationship to the entrepreneur. The confined list should comprise only of the
individuals whom the
entrepreneur trusts well and is responsible enough with providing
the necessary funding for the new business.
Send out a letter
Once the names have been short listed, the entrepreneur needs to formally go about
the request for funding. One
way of asking for funding is by devising a letter that describes the new business
proposal. This letter should then be sent out to family and friends through direct
mail. By taking the time out to write a letter describing the business proposal
and asking for financial support, the prospective business owner makes a more personable
and professional funding appeal to his/her loved ones.
Follow-up
Once a letter to family and friends has been mailed out, the prospective business
owner should follow-up with everyone they have asked. This can be done via telephone,
e-mail, and even through post cards. For those who are interested, entrepreneurs
need to send out a more detailed business proposal and a financial agreement that
promises to pay back the amount owed. The latter is extremely important for family
members and friends because it is a contract between all parties involved on how
and when the borrowed money will be returned.
If an entrepreneur follows these rather easy steps, then asking their family members
and friends for startup funding can be an organized and easier process than one
may have initially thought.
Conclusion
When asking family and friends for funding, an
entrepreneur should follow some steps
in order to make the process easier for all parties involved. First, they should
compile a list of all possible contacts with whom they could possibly ask for business
capital. Once the list is refined, a formal business proposal should be mailed out
to each contact and followed up soon after. For those parties who are interested
in financially supporting their loved one, a contract should be made regarding the
entrepreneurâs intent to pay back the borrowed money.