Most VCs won’t invest in startups super early. There are some exceptions: my company Hustle Fund tends to invest quite early, and so do a few of our peer funds at the pre-seed level. However, there are only a handful of us, and 99%+ of startups won’t be able to raise money at this stage. Alternatively, if you are a successful entrepreneur or have great connections, multi-stage VC funds will also invest super early in these types of founders.
For the vast majority of entrepreneurs, doing a friends and family round of funding during the earliest stages of a company is the primary way to raise money. I know for many people, raising from friends and family doesn’t come naturally. Many entrepreneurs may feel like they don’t know enough rich people to raise money from their network. Many people – would be investors – whom you ask to invest may also feel like investing is only for the really rich. It can also be confusing and awkward to ask people close to you to invest. How do you even broach the topic? Will the person be taken aback? Will it ruin your relationship?
Here are some tactical tips from my personal experience that might be helpful:
1. Dedicate lots of time to fundraising.
Fundraising, in general, takes a lot of time, and, raising from friends and family is no different. As I’ve written about previously, one of the biggest challenges in fundraising is that it just takes so much time to balance running a company and raising money.
2. Set up “catch-up” meetings with friends and family.
It’s really hard to know who will be interested in investing in your new venture. Set up “catch-up” meetings with everyone who is smart, has means, and/or is well-connected. In each of these meetings, you’ll certainly “pitch” your new venture, but you are not necessarily looking to raise money from each of the people you meet with. In some cases, you may only be looking to get introduced to more people who may be good to meet.
Pack these meetings into a limited period of time to maximize FOMO as well as maximize the efficiency of your fundraise.
3. Be creative about your meetings.
Your meetings could be coffee catch-ups, but in other cases, maybe you cook brunch at your home and invite people over. Maybe you invite a lot of people over at the same time. In other cases yet, you may want to do a group social activity; it could even be bowling! Whatever works for you and what you think your friends, friends-of-friends, and family may like doing to make your meeting less formal.
Your meetings don’t have to be stiff coffee meetings.
4. You are always “pitching” even if not formally.
You should always have a deck ready to show on your phone or computer, but you don’t always need to use it. I find that at the earliest stages, people are mostly investing in you.
Make sure that at some point in all your catch-up meetings you mention:
- You are starting a new company
- One line about why it will change the world – think very high level here
- You are raising money for the company
- You are raising only from friends and family
- Casually ask if he/she would like to invest or if he/she knows 1-2 people who might be interested in potentially investing or may know other potential investors
It is important to get each person you talk to very excited about your business. I find that one of the biggest mistakes entrepreneurs make in pitching their high level ideas is that they say too much about what their product idea does. For example: “I’m starting a new social network that will combine Facebook, Snap, Instagram, WhatsApp, WeChat, and LINE all in one place.” Or, “I’m starting a new AirBnB for retired people.” This isn’t very exciting. The only person excited about your product mechanics is you. However, you can get people excited about outcomes: “I’m building a new social network that will bring people globally closer together – so that people in India can talk with people from Japan.” Or, “I’m starting a new type of housing platform so that older people don’t need to live in stodgy sad retirement homes and can live a vibrant independent life.”
When pitching to people who do not invest for a living (i.e. non fund managers), it’s important to explicitly mention that you are raising money and that you want their help. This could mean that they could help introduce you to other people and/or that they could invest.
There are a lot of people on the internet who say you should ask for advice and not money. IMO, this is really awful advice. Most people who do not invest for a living – even active angels – don’t realize they are being asked to consider your idea as an investment if you don’t ask for their help in raising money. If you are talking with your dentist about your new startup, his/her first thought is not, “Oh I wonder if I can invest?” or even, “I would never invest in this.” His/her first thought will be, “Oh cool, John/Jane Doe has a new career. I’m going to make a mental note that he/she has left Cisco and is now working for himself/herself.” They don’t see themselves as investors, and so you need to explicitly make the ask if you want an investment. You cannot just assume that people will volunteer to invest.
Your conversation might end up going something like this:
“So yeah, lots of new changes. I left Cisco, and I’m now starting a company. We are trying to do ABC in the world, and if we’re successful, DEF will happen. Right now I’m raising some money from friends and family to achieve XYZ goals. I wanted to see if you might be interested in potentially investing or know 1-2 individuals who might be interested and good to talk with?”
(Please don’t monologue. Those are only the rough talking points that you need to bring up.)
At this point in the conversation, you are making the ask only to see if the person will consider investing (or knows someone who might be good to talk to). You are not asking for a commitment.
It is important to mention that you are raising money from friends and family. A lot of people have in their heads that entrepreneurs raise money from funds and don’t realize that at the earliest stages, friends and family have the opportunity to invest in your company and also get the best deal. This is what you need to communicate to would-be investors.
A lot of people also think that investors need to be super rich in order to invest. This is also not true and also what you need to inform people about.
When you are first starting to raise money, my personal strategy is to set a lower minimum check size and generate momentum. This makes investing very accessible to many professionals. I know lots of “angels” who invest $1k-$10k per deal. I think many people think that angels need to put in at least $25k per deal, but that is simply not true anymore. Now, you as an entrepreneur may not want a lot of people to put in less than $25k because it will mean you have to do a lot of meetings. However, when you are first starting out and you don’t have a strong investor network, it may be worthwhile to accept some smaller checks to get the flywheel going and also to say Bob or Mary has invested in your company to generate buzz with subsequent conversations. Once you start to get checks in the door, you may want to increase the minimum. As a result, investing in startups is actually accessible to many people in your network. They just don’t think about it that way, and it’s your job to change that mindset.
5. You are selling more than your company
At the earliest stages, people are investing in you. There are other things you can do to sweeten the deal. One of the things that we do at Hustle Fund is host a meetup for all of our investors in our fund multiple times a year. It’s an opportunity for them to meet and get to know each other. In general, well curated and exclusive networking events are a really good draw for people to participate in things (as I wrote about here as a tip for getting speakers for a conference). People always want to get to know other rich and well-networked people. If your initial minimum is, say, $10k, then not only is someone buying a stake in your company, but he/she could also potentially be buying into a network. And you can facilitate this for free or really cheap. You can host these in an office space for free. Plus, pizza, wine, and cheese and crackers are pretty cheap.
People who invest in you – especially friends and family – are buying an experience. They are not just buying a transaction. Make that experience a good one.
6. Do a formal pitch & call-to-action if someone is interested
From the catch up meeting, if someone is interested in learning more, you can either dive into details right then and there (preferable if you all have the time) or set up another time to talk.
This is where it’s important to have a pitch deck and materials ready. At the end of this pitch, try to push for a yes or a no. In many cases, people will need to think about your deal, but, if the person you’re speaking with is ready to commit, have a SAFE or convertible note ready to sign.
7. Be transparent
If an investor has committed but hasn’t invested in a startup before, it’s important that you clearly outline the risks. I would say something like this: “I am flattered that you are going to join our round. And I think this is a great opportunity. But I really want to emphasize that investing in a startup like this is an incredibly risky endeavor. I could potentially lose all your money, and there is a high probability of failure.” People usually appreciate this level of transparency, and I’ve never known anyone to back out. I think that it’s important to highlight this in case/when things go awry down the road. Moreover, psychology suggests that in many cases, when things are slightly pulled away from you, you only want them more.
8. Re-assure friends/family that it’s ok not to invest
If you sense that someone feels awkward when you’re asking for his/her help, it’s important to re-assure him/her that it’s OK to not participate. You might find yourself in a dialogue like this:
“Oh…oh. Well, I don’t really have any money to invest.”
“A couple of thoughts – 1) First off, I value our friendship/relationship above all else. So, I don’t want to put you in a tough position. If this isn’t a good fit, that is totally cool. I just wanted to give you an opportunity that I think is great. 2) I also want to mention that since this is a friends/family round, we have a low-ish minimum of X. I don’t know if that changes things, but just wanted to highlight that.”
It’s really important for the sake of your relationship with the person to re-assure him/her that it’s OK to not invest. You are presenting and opportunity, and that’s it.
9. Don’t run out of leads
The best piece of advice that I received when I was raising money for Hustle Fund was from Charles Hudson, who also runs a pre-seed fund called Precursor. He said, “Don’t run out of leads.” This is very good advice. If you have infinite leads (and time), you won’t have to worry about being rejected as you go along, and that is exactly the mentality you should have going into and throughout your fundraise.
When I was a first time entrepreneur years ago, I remember being incredibly afraid of rejection. I didn’t push people to a yes or a no for most of my raise. By having the attitude that you have infinite leads, you will force all potential investors you’re talking to into a “yes” or “no” answer. This is a good thing. A “no” means you can stop wasting your time with someone who isn’t going to commit.
It also means that you need to keep generating leads to have enough potential investors fill your round. As you go along, this gets harder because you’ll start with people in your network who are closest to you and then work outwards and chat with people who may be friends of friends of friends who don’t know you at all. This is why it’s so important to constantly ask everyone you talk with for introductions or 1-2 names of folks they would recommend talking with… because you can’t run out of leads.
Now another typical piece of advice that you often hear is, “Never take an intro from someone who doesn’t invest.” I would say this is true of VCs. This is NOT true of non-professional investors: angels, friends, and family. VCs have funds to invest from, and it’s their job to invest money. If they pass, then they didn’t like something about your business, and that’s a negative signal. If I were running a startup, I would not take an intro from a VC who passed. But angels are different. They don’t necessarily have pools of money that they need to invest. If an angel passes, it could be because he/she wants to set aside money to repair the roof on his/her house. Or save some extra money for his/her kid’s private school. Or take a fancy vacation. Or buy a new car. Angels can do whatever they want with their money, including not invest. So, if an angel passes, that isn’t a knock on your business per se, and most people understand that. Also, angels run out of money all the time. They may have been active before, but until that portfolio becomes liquid, an angel may be tapped out of funds even if he/she wants to invest in your business. So, definitely ask for intros to other potential investors from individuals.
I usually try to ask for 1-2 introductions because it’s a small but anchored request. If the ask is too broad, such as, “If you can think of anyone who might like to invest…”, then no one will think deeply about it. Try, “Can you think of 1 person who might be interested in taking a look at this?” Asking for just 1 or 2 leads is a small task, and almost everyone can think of one specific person he/she knows who may be interested in chatting with you.
Pulling together a friends and family round is a bit of a crapshoot and takes a long time. Part of the challenge is in identifying which people are interested in investing in you and has some money to do so. I’ve found that it’s hard to predict who will end up joining your round. The richest people are not necessarily the most bought into the opportunity nor are they necessarily investing a lot into startups. In fact, many super rich people are a bit risk-averse because they want to preserve their wealth. Conversely, many people whom you may discount as not having much money may actually be really bought in. In fact, I’ve found that people who are not super rich tend to also be more risk-taking because they want to become super rich. In the end, you’ll just need to meet with a ton of people. You’ll need to do a lot of meetings, but raising a friends and family round even if you’re not well-connected can be done.