October 22nd, 2008 10:45 EST
How to Get the Early Stage Money You Need From Friends And Family (Part 2 of 3)
This is the second of three simple parts dedicated to helping you to raise money from friends and family. This material is part of a new guide booklet that I have put together to help you to successfully raise the money that you need to launch or grow your business from people who are close to you. Please let us know how it helps you by writing comments at the bottom of our blog. And as always, if you need any help, please call our office.
Use of Funds
One of the most important questions that any investor wants to know is "what will you use this money for?" You have to be able to demonstrate that you have a serious business purpose for using the money. And by the way, taking a salary for yourself can be only a small part of the business purpose that they expect to hear you articulate. They may find it appropriate for you to take a small amount of money while you`re developing your project, but they do not want to know that 80%, 90% or 100% of the money is going to fund your lifestyle instead of going into growing the business. You have to be able to document that you will use the money for the purpose of growing the business and getting it to a place where either it can be self-sufficient, or where you can raise even more money from outsiders in the future.
Profits and Payback
The primary reason that an investor puts money into a business is so that they get that money back, plus more. A person who does not have an arms-length relationship with you may not have exactly the same expectation as a stranger, but they still expect you to make a serious effort to return their capital plus more. It`s critical for an entrepreneur to demonstrate that the plan for the business that they have will produce more money than the amount that was invested. The business plan has to demonstrate all of the mechanisms that are critical to make this happen.
What`s the Problem?
It`s not critical to provide a tremendous amount of detail to friends & family investors with regard to your business plan at this level. However, you do have to demonstrate that the community has a problem and that you have a solution that will address this problem in a significant way. All businesses are based on solving problems that people have, and being paid for those solutions. Your job is to demonstrate that you have great control of this area.
The hardest question to answer is also the one that comes up the most. Entrepreneurs and investors want to know what share of the company the investor gets for his or her money. Since the company is usually new at this point and very little value has been created beyond the idea itself, establishing a value is hardly scientific. It is more about how well you can sell and get others to put up money. The bottom line is that you want to raise the least amount when the company is worth very little. Conversely, later, you will want to raise more when the company is worth a lot because that makes the money less expensive.
How Much is Enough
For a Friends & Family round, the amount that the entrepreneur should ask for will vary based on the needs of the business, but the goal is to take as little as is necessary because when the business is worth the least, you have to give up the most. I usually see first round raises in the amounts ranging from $250,000 to $600,000. Although, sometimes for smaller deals the first raise can be as small as $75,000.
Please look for the final part of Raising Capital From Friends And Family on Friday, October 24, 2008.
About Joel G. Block, President of Growth-Logic, Inc.
Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker and advisor. To bring Joel into your company, please visit www.joelblock.com or www.growth-logic.com. Also, be sure to check out our newest project: a blog to organize the blogs that cover entrepreneurship - http://www.entrepreneur-hub.com. And finally, for film makers: http://www.filmfundingblog.com - our newest project.