Angel investors and venture capitalists get a lot of attention when it comes to small business financing, but in reality, startups get much more business funding from family and friends. A report from Fundable.com found that in 2013, friends and family members poured $60 billion into small businesses while venture capitalists invested just $22 million and angel investors contributed only $20 billion. In fact, 38% of all startup entrepreneurs in 2013 raised money from their loved ones, with the average investment totaling $23,000.
Why are friends and relatives the biggest investors?
Because they are the ones who know and trust the business owners the best. So, while it may be uncomfortable to approach your loved ones for money, they will probably be your best bet for startup funding. And even with friends and family, it is important to have an effective sales pitch. The following steps may help you find more success with your closest funding sources.
Prepare a Business Plan
Show your relatives and friends that you are serious about your startup by having a sound business plan, one that reflects market research and a plan for attracting customers and managing costs. It would be even better to ask your loved ones to help fund a specific goal or milestone of your startup rather than in just the business in general.
Ask for Loans, Not Handouts
While free money would be nice, you are more likely to get contributions if you ask for them in the form of loans. You can offer the option to convert the loan into equity shares when the company reaches certain heights. Whatever the terms, get them all to put in writing and certified by a professional to make the loan official.
As a startup, you should never underestimate potential funding from loved ones. Also as much as relatives and friends can offer funds, they can often also provide you with valuable contacts and connections to people in your industry. This can sometimes be as profitable to your business as actual cash.