Family and Friends As our Best Kept Secret
Last week I got an email from a former schoolmate who I have not seen in the last 30 years,saying that someone who reads my column in The Interviewwould like to speak with me. He wanted to know if it was okay for him to pass on my mobile phone number to him. The first thing that came to my mind was, another young person looking for mentorship.Presently, I have more than enough of that on my plate.
So it was a great relief that when we finally spoke, he commended the magazine and the column,for which I express my appreciation. It is always nice to know that some of our young people are interested in knowing what is happening in the market place and are also willing to take the plunge and start their own businesses. His question to me after a long conversation is the thrust of my article for this month, which was “How do I raise money to start all these businesses that you have been writing about in your column?”
Unless you are one those who have a machines that mints money, then you will find yourself thinking about how to transform your budding idea into a functional product. Times have really changed and investors do not find investing in start-up appealing anymore, so you will need to find creative ways to source the resources you need for your business.
I did not have to break a bank or chase after anybody to start my first business. What I did was to keep my job and work on the idea part time, which saved me the shock of being unemployed and worrying about where the next wage will come from. The model I also employed was to make sure that the business grew ‘organically’.In other words, I made sure I did not pay myself asalary for the first two years of the business and all the profit from the business was reinvested into it to grow it at the initial stage. I also spent a lot of time training young and inexperienced staff, which reduced to the barest minimum the cost of running our business. In the words of venture capitalist Paul Graham, “Don’t raise money unless it wants it and it wants you.”
If you need to raise money for your business these are creative ways to do it:
Family and Friends
This is one of the easiest ways of raising funds to start your business. Banks and investors tend to shy away from lending money to business start-ups and most of the time, the money required is not even worth the trouble that the banks would put you through.
This is your best optionfor securing money to get the business off the ground.If your friends and family will not give you money then who will? If one or a few of them have successful businesses, even better. Bringing them on board as investors transforms them into motivated advisors and partners. Plus, they will most likely be more forgiving than outsiderinvestors will when your business goes through the winter season
Raising money from family can also be a big confidence booster for future investors, as it demonstrates that you have a strong personal network behind you and you are open to correction when flexibility is needed.
The only drawback to asking friends and family for money to start a business is that if things go badly, it could strain the relationship and cause a long-term feud between family members. It is very important, therefore, to make sure that you do not get too informal with your business relationship. Be upfront about the risks, lay out the business plan that the money will fund and put down the rules guiding the investment in writing.
Support from family and friends can come in any of the following three forms:gifts, loans or investment.
Gifts: The great thing about a gift is that you don't have to pay it back. But you will be limited with the amount you can raise as compared to offering a relative or friend a part of the business. Also, gifts can quickly turn into loans in the minds of friends. A signed document saying the money was a gift will protect you down the line.
Loans: I always suggest loans as the optimal way for friends and family to invest, because there are set repayment terms. They will know how long it will take for them to get their money back and at what interest. A lawyer can easily draw up a "contract” detailing the terms of the loan and repayment plan.
Equity: There is a need for you to involve a lawyer in this from the beginning, because you are literally turning a friend or family member into a business partner, if you give them an ownership stake in the business. The fact that you don't have to pay them until you make a profit or cash out makes it important that you protect all parties involved.
Also, be prepared for some tough business questions,especially if it is a friend or relative who knows something about starting or running a business and has been successful at it.Their point of view may just be what you need to get that business up and running.