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Startup Funding Preparation: Approaching Friends and Family

Seed Funding Preparation from The Startup Garage

Starting any business will require some initial capital, even if only to register the business. Most startups will have additional expenses to develop the product or service, acquire a physical location, pay employees, market the business, etc. Unfortunately, angel investors and venture capitalists are rarely interested in funding a company at this stage.  There are many reasons why they don’t fund companies  early on, one of which is because the amount of capital that a company needs at this stage typically ranges between $15,000 to $40,000, much less than what these investors want to invest.

Startup Funding Options

This leaves startups with two options, obtain a loan or get funding from friends, family, and/or founders. Obtaining a loan can be difficult as the business does not have any assets.  Not everyone wants or is eligible to obtain a business credit card.  Friends and family are often a good alternative for entrepreneurs in this stage and their funding can come in the form of a loan or in exchange for equity in the business.  Lastly, many entrepreneurs seek out a co-founder who can come on board to finance the business’ initial expenses and bring on expertise that the original founder may lack.  In any case, an entrepreneur will need to prepare some tools to help them pitch their idea to their friends, family and/or potential founder.

Startup Funding Business Plan and Pitch Materials

Before you begin asking friends and family for a loan, it is imperative that you have put in the time necessary to write a business plan. Even when a business plan is not completely necessary to receive a loan from your friends and family, we believe it is a moral obligation to go through the business planning process in order to protect the investors’ money.  At the minimum, you will need some form of documentation to help pitch the idea, whether in the form of a written document or a presentation.  Your documentation should clearly portray your product and/or service and it should include two main points: 1) what problem in the market does the product/service solve; and 2) why does the product/service solve it better than the competition. It may be helpful to examine who the competition is, their pricing, their main features, etc. You will want to identify your target market, state why this market is attractive, and ideally, quantify the size of the target market. You will also want to demonstrate your sales and marketing strategies for gaining your target market’s business. Next, you want to demonstrate who will run the business and how the business will be run. You should also be prepared to provide some simple financial projections. These should include projected revenue, the cost of your product/service, operating expenses, and profit. You should show how the business will grow overtime and demonstrate the drivers of that growth (i.e. hiring a sales rep, growing the marketing budget, etc). You can wrap up your presentation by showing how much capital you need to raise and what it will be spent on. Lastly, you may want to develop a contract outlining the terms of the agreement or at least be prepared with some ideas of potential terms that you would like to discuss.

Want To Learn More?


Download our free Raising Capital From Friends, Family & Founders eBook.

This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.