Anyone have any specific recommendations they can give for raising a friends and family round of financing? I'm wondering about the usual approach about how much equity to give and what the valuation would be since obviously the business is going to be in an early stage. Any advice is greatly appreciated.
It is a knee jerk reaction from me to ask anyone considering raising funds; Do you really need to?
Keep in mind, that question is coming from a guy who owns a funding platform and built a seven figure professional services business that helps people raise funding.
I can give you plenty of perspective on what a friends and family round looks like - what the pitfalls are - what the advantages are - how to structure the deal - but the first thing I always challenge people to do is tell me why they can't do it without the funding.
Generally people will initially respond with capital expenditures that MUST be made to proceed (buying a building, developing the software, manufacturing their first run of widgets, salary so they can quit their day job). However, they only MUST be made when thinking of the FINAL state of the business - and building it like a house, start to finish, in sequential stages that see ALL the framing done, and ALL the plumbing done, and ALL the finish carpentry done. While this is a perfectly good method for building a house - since you can't really reside in a partially completed one - its a flawed approach to building a business.
You can start with a single small part of the business - or in cases where the final product you want to sell really does require a large capital expense to put into market, use a proxy.
If we return to my housebuilding example - a proxy in that case would be also pitching a tent on the property. It isn't the dream house you want to live in - but it provides some of the benefits and will get you closer to your dream house (you can enjoy the yard!).
In the case of starting a business there is nearly always a similarly useful proxy. Imagine you want to start a company that builds a software to solve accounting issues specific to farm-to-table vendors in a local market setting.
You could start by raising funds and fully developing the software and then doing marketing to uncover effective channels for distribution and then developing your funnel to convert leads produced into sales...
Or, you could start by creating a small consultancy to help that same niche population setup their accounting systems. Or, even smaller - a digital information product like an e-book, online course, or webinar that teaches them some specific best practices for handling their accounting.
This allows you to get started working with your target population much faster, and much more cost effectively - while also forcing you to get in front of real customers and work with them to truly understand the pain that your "dream house" solution will eventually solve at scale. It will ensure that you've gotten the dream right - and avoid building something in the lab that may not stand the test of the real market needs.
Not the answer you were expecting I'll assume - and the offer still stands for advice on the F&F round, but I can never in good faith give people advice about fundraising without first exploring and validating the need.
You might want to look into convertible notes, I hear they're rather fair and help you dodge that issue until the next round of funding.
They're also pretty much standard for seed funding in SV from what I've read.
I think the whole "skip the valuation" part is a major improvement, so the Business Angels (or your family) only have to answer one question: does this business have a good shot at succeeding ?
At that stage, its better to receive funding by a convertible note than with equity. Discuss valuation in further rounds when everyone has a better understanding of the value being created. Doing it at such an early stage and with non professional investors creates a huge contingency for future financing.
My advice would be don't do it. You will lose your friends and family if your are not careful.
I am not trying to sell you on calling me. Really, I am pretty busy with my businesses and consulting. However, I need more info before I could have a greater impact in helping you.
Ask, Ask, Ask, then Ask again.
Here is $10,000 worth of information for free and in a nutshell.
Concentrate on the 3 M's. There are actually 7, but 3 will do for now. These are Market, Message, and Media. They come in that order.
Who is your target market (customer, clients, buyers, users, etc.)?
Tailor your laser focused message for this target market.
What is the best media mix to get your message to that market?
Here's what you do...first, make it an offer that is so incredible that they cannot resist. Secondly, do all the work for them. Make it so easy to make the purchase now that they can do it virtually without effort. Thirdly, give them an incentive to act right now. Fourthly, offer an almost unbelievable guarantee. Fifth, offer a bonus for acting now. There are many other incredible steps, but these steps should help the novice to the professional sell anything.
Whether you are selling B2B or B2C, you have to focus on selling to only one person. You can actually sell to one person at a time while selling to millions at a time. They are one and the same. Don't get off track, what we call digital marketing selling is just selling in print. And that has not changed since Cluade Hopkins wrote "Scientific Advertising." Really long before he wrote the book.
The secret to success: I have had the pleasure of knowing and working with some of the biggest names in business, celebrities, actors, entrepreneurs, business people, and companies from startup to billion dollar operations. The number one reason for their success is doing what they know and love while doing it in new, creative, and innovative ways.
Ask, Ask, Ask. Have thick skin and learn from each "mistake." In a short while, the market will tell you what you need to do and who and what you need to ask. But get started now even if that just means asking a contact on LinkedIn.
While you are thinking, think big and think of something at least 1% better, newer, or different. And being cheaper is not a winning strategy.
Make decisions quickly and change decisions slowly..unless you are actually going off a cliff.
Remember these two 11 letter words...persistence and consistency. They are two of the most important tools ever invented.
Treat everybody you talk to and everybody you meet (including yourself) like each is your number one million dollar customer.
Bootstrap when possible and reasonable. Read "How To Get Rich" by Felix Dennis. Or better yet just remember the camel's nose in the tent story.
However, sometimes you just need to make a deal.
Listen, in any business you have to take some chances and some risks. Make sure you don't need a license and go for it. Remember, timid business people have skinny kids. Paraphrased from Zig Ziglar.
Best of luck,
Take massive action and never give up.
Michael Irvin, MBA, RN