Raising capital for a new business idea is often one of the most challenging tasks that entrepreneurs have to lift their projects off the ground.
In most cases, whether the idea is good or not, the element of credibility is often missing in the picture – although some entrepreneurs may have a track record already to back their claim.
As a general rule, most outsiders will find it hard to invest in a project that is at a seed stage unless they have some sort of personal connection with the entrepreneur.
For that reason, business consultant Jasdeep Singh believes that the best chance entrepreneurs have to raise capital is found within their inner circle – a circle known as the 2Fs, which stands for friends and family.
Family, in this context, is understood as the closest relatives an entrepreneur has, which includes parents, brothers, sisters, cousins, uncles, and even grandparents.
The close connection and the significant number of years during which the members of this group have come to know the founder of the business create the most important asset: trust. Trust takes time and experience to build, and in this case, family will have seen the entrepreneur in a variety of situations over years. It is always easier to communicate a business proposal and the merits of an idea if the people listening already trust you.
That said, keep in mind that just because family may know you since childhood doesn’t mean that the founder doesn’t have to convey the merits persuasively. People may find that some relatives are stricter than expected when it comes to investing money.
According to Dr. Singh, who holds an MBA from the University of Connecticut, entrepreneurs should bring all their guns to any conversation – formal or informal – to solidify their proposal in a way that increases the odds of securing the funding they need.
Friends come next in the process of raising capital during the early stages of a business. Some of your friends may be in helpful areas, such as your target industry or finance, and may be closer to the founder as a professional than family members.
The credibility barrier for friends will largely depend on prior experiences – known by the prospective investor – in which the founder has managed money or in any successful or failed business endeavors that may have come to their attention.
With friends, entrepreneurs may rely on the relationship to at least be heard in a meeting but should be careful to not over-leverage the relationship and create a negative interaction. No one appreciated feeling forced. Friends also may be placing some of their own reputations on the line to get such a meeting, so be prepared with your best work so as to best present the company as well as the friend.
Friends in this category can also include connections through LinkedIn, alumni groups, and online discussion contacts. Coming out and asking for help can many times stop conversations. Instead, reaching out to learn from them, deepen the conversation, and share ideas can be highly effective ways to build the trust necessary to get a meeting in place. Here, integrity, honesty, and time are critical in each interaction.
Other alternatives to consider
Outside investors are not a group to be overlooked in the quest to finding funding.
In most cases, the people outside your inner circle who might be willing to invest are likely to be well-trained investors who understand not just the risks, but also the potential of your venture.
Singh assures that although this crowd is not an easy one to persuade, if entrepreneurs provide the right kind of information, they can become valuable partners for the business.
Founders should prepare a pitch deck – which is a presentation that highlights the elements of the business idea – to convey the most relevant aspects of the investment.
They should also be ready to answer any questions they might have about the business while having the humility to answer “I don’t know” when the answer seems rather unclear given the early stage in which the business is at.
The importance of having ‘skin in the game’
Any of the three types of investors mentioned above will highly value the fact that the entrepreneur has committed money, time, effort, and a steady job in the pursuit of an idea.
That ‘skin in the game’ factor will be crucial to ensure the success of your proposal, says Singh.
If you are currently struggling to find funding to lift your project off the ground, look no further than these three groups of people as they are the ones who will be the most inclined to say ‘yes’ to your capital raise.