Nearest and Dearest: 6 Secrets to Raising Funding from Family and Friends

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Blood may be thicker than water, but things can get tricky when family (and friends) are your investors. Here’s how one founder made it work.

By Jody Porowski (Founder, Avelist)

When I tell people that I raised Avelist’s first round of funding from friends and family, I get one of two reactions: People either tell me that I’m lucky or that I’m crazy. And funny enough, I understand both of these reactions because I never thought I would raise money from friends and family.

First of all, I’m not one of those people who has a bunch of millionaire/billionaire friends running around her. And second of all, generally speaking, I like the thought of keeping my work and my personal life separate. However (and this is a big however), I decided to raise money from people that I knew because it was the best option for my company at the given time. It’s as simple as that.

Early stage investing is largely based on relationships and track record, so it’s a tough job for a first time entrepreneur. And that’s what I was when I started Avelist: a first-time entrepreneur with no pre-existing network in the entrepreneur/VC community. I was literally starting from scratch. My friends and family were the ones who knew my character, knew my work ethic and knew my personal track record, so it made sense to raise my first round from them. Here’s what I learned in the process.

How (and Who) do You Ask? Use Your Judgment!

I have to be honest, raising money from friends and family was an uncomfortable thought for me at first. The “ask” was scary because I didn’t know how to bring it up and I didn’t want to put any of my friends or family in an awkward situation.

Everyone’s fundraising style is different but in this particular round I came up with four successful methods.

Option 1: The mass email

When I started raising my first round of funding, I put together an email that explained the company, our vision and our progress to date. I sent it to myself and BCC’d a ton of people. I asked if any of them were interested in partnering with us financially. And I told them to feel free to forward the email to others who might be interested. Remember: “Friends and Family” is a broad term — this is your chance to hit everyone. I’m serious. Include your 5th grade teacher.

Option 2: The personal messenger

Sometimes I thought of a person who might be interested in investing but I didn’t know them well at all. In this situation, I’d find someone who did know them and who was willing to tell them about my company. A lot of times this turned into a meeting and often into investment.

Option 3: The group event

This method was a bit out of the box. I held a few information sessions complete with appetizers, drinks and a Powerpoint presentation. These events brought my team, our advisors, potential investors and members of the media, into the same room to talk about the vision of Avelist. I always mentioned that we were raising money from friends and family and asked people to contact me if they were interested.

This was a great way to tell people about the investment opportunity without putting them in an awkward position.

Option 4: The direct ask

In some situations (for example, if an individual had already made investments in startups), I asked them directly if they were interested in investing. They are used to straightforward, business conversations, so make sure that you’re direct.

Tell them you’ve started a company and are raising money. Ask them if they’re interested in learning more about the company and the investment opportunity. You can ask via email, phone or in person.

Remember: It’s Business, Not Personal

You have to be confident. Tell them about the opportunity and see if they want in. Above all, you aren’t asking for charity or a donation.

You are offering people an opportunity to get a return on their investment. Believing in your company is the first step toward getting others to believe in it. And you can’t take it personally if people say no. As a good friend of mine told me in the process, “You have the right to ask me to invest and I have the right to decide yes or no.” I couldn’t agree more. This is business.

But it Actually is Personal

So protect the relationship. Do not, I repeat, DO NOT over promise. I made a point to tell each investor that they could lose everything they put into the company. And I asked them specifically not to invest anything they weren’t prepared to lose.

I told them about the opportunity and I told them about the risk. It was up to them to decide whether they wanted to back us. If someone was on the fence, I told them not to invest. I also told each person that I cared about them and our relationship more than their money. And I meant it.

Speaking of personal relationships, I know that every part of you wants to raise money for your company, but I encourage you to think about the ramifications of partnering with each individual investor. Is someone unstable or highly emotional? Do you already have a complicated relationship with them? Do not take their money! Choose carefully who you take on as investors and pick people who can treat it as a business transaction.

Bottom line: mixing business with personal is tough. You need to do everything possible to make it a good situation.

Take it Seriously: Hire an Attorney

Hiring an attorney is the best way to protect your relationship with your investors and to protect your business. No matter how well you know these people and how sophisticated of an investor they are or aren’t, you need to take it seriously. Pay an attorney. Find one who specializes in your industry and in startups. Why is this so important?

First, there are a lot of legal ins and outs of fundraising and you don’t want to mess things up. Legal mistakes can come back to haunt you, including having a negative impact on future rounds of funding. Professional investors do not want to deal with your messy legal jobs or complicated family dynamics. Keep it clean, keep it simple, and think long term!

No matter how good of a relationship you have with a friend or family member, a contract turns things into a business agreement, which is exactly what you want this to be. Having things in writing inevitably puts everyone on the same page. Even if your friend or family member insists there is no need for a contract, you need a contract.

Treat Friends and Family Investors as You Would Any Other Investor

Your friends and family might trust you because they’ve known you for a long time, but they also might not be aware of your professional capabilities. They knew you when you were five and you ran around the house pretending to be a dog. The more official you make your fundraising process, the more confidence you’ll instill in your Friends and Family investors. Hire an attorney. Create a board of advisors. Put together an official pitch deck. Show them you mean business!

Finally, remember that your friends and family investors are real investors who deserve your respect. Once they put their dollars into your company, they become your partner. Be sure to keep them updated on the company’s progress. I send quarterly updates to all of my investors complete with metrics, upcoming plans, changes to the team, etc.

Be Willing to Invest Your Own Money

In addition to raising money from friends and family, I also sold my house to fund my company, and worked two jobs for a while. At the end of the day, I wouldn’t ask anyone (friend or stranger) to back something I wasn’t willing to back myself.

If you don’t have personal money to invest, consider the other ways you can “invest” in your company and prove your dedication. You have time, talent, passion and energy. How many hours a week are you working? How much of your social life have you given up? How much of your mental energy does your company consume? If you’re taking money from friends and family, you better be ready to give it your all!

Well, there you have it! If you’re planning on raising a “Friends and Family Round,” I hope my experience helps you navigate the process. And if you’re still not sure that this is the right method for you, it might not be. Luckily there are other options for the early stage entrepreneur. Consider applying to an accelerator program. Look into crowdfunding platforms. Or go for the good old fashioned boot strapping route. When push comes to shove, it’s our job as founders to figure out what’s right for our own companies. Good luck to all of us!

Did you raise money from family or friends? Any tips?

Jody Porowski

About the guest blogger: Jody Porowski is the Founder & CEO of Avelist, a platform that crowd sources other people's knowledge and experience to save you time and give you guidance. Follow Jody on Twitter @JodyPorowski and check out her company at www.avelist.com