Opinions expressed by Entrepreneur contributors are their own.
Many an entrepreneur has turned to friends and family when it comes to securing the funding to start a business. In fact, “Friends and Family” has a place in the lexicon of entrepreneurship, along with “Bootstrapped,” “Angel Investors,” and “Venture Capital Financing.”
Typically, sourcing from friends and family is common among young or nascent entrepreneurs. Serial entrepreneurs, who have had a lot of success, typically have the bravado to believe they can self-fund their business or the track record to approach angels or venture capitalists.
It is only natural, especially for the young entrepreneur who is just embarking on his or her entrepreneurial journey, to approach friends and family.
That is how I got my start as an entrepreneur. When I was six, my dad played golf at Biltmore Country Club in Barrington Hills, Ill. Many times, I would ride on the golf cart with him. I remember vividly watching golfers hit their balls into the water hazards. They were unwilling to go in and retrieve the ball. Rather, they would pull a new ball from their bag, take a drop and play on.
This led to my first entrepreneurial idea. “Why can’t I go in after the balls and sell them to the same golfer that hit the ball in the water?” So, I ran home and got my waders, a thermos and dixie cups and dragged the table on the golf course. In a couple hours, I had made an astounding sum of $50. My dad’s membership at the country club, and being able to use equipment he had purchased, became my first unofficial investment in my business.
Resources, equipment and connections are all great substitutes for an actual investment from a member of your friends and family network.
Flash forward to this fall when I read about a study produced by researchers at Indiana University, which suggested that entrepreneurs who “often lack resources and funding needed to launch a venture … reach out to family and friends for initial support.” The study went on to look at “how accepting funds from these individuals influences an entrepreneur’s risk-taking preferences.” I don’t disagree with the premise. But I also believe that if you engage with the “right” friends and family, the entrepreneur’s risk tolerance will not be impacted.
Related: Seeking Startup Capital? Ask Your Family and Friends.
Don’t pick a housemate
I know, this runs counter to what I did with my dad — but the last thing you need as an entrepreneur is someone watching your every move. Maybe you are unwinding, watching a show on television. You can feel the investor’s energy, questioning whether there is something you could be doing to make the business more successful.
Choose someone who knows your industry
Let’s say you are starting a business referring clients to law firms. Ideally, finding an investor among friends and family who is a lawyer would be ideal. Not only would this investor know and appreciate your vision, but they could open doors to partners and initial clients. As we entrepreneurs know, getting that first partner or customers can be the foundation of future success. This qualification can apply to someone who is more of an acquaintance, rather than a friend, depending on how aware they are of the industry.
Engage with someone who has good credit
There are many reasons for this. First, someone with good credit has resources. Their investment in your business will not leave them in a precarious spot, where if your business struggles, then they struggle. Second, having good credit means they have access to capital, which could support any emerging working capital needs. They could also support any opportunities you encounter to dramatically transform your business. More than ever, those with good credit have outstanding access to alternative funding.
Related: How to Fund Your Business Through Friends and Family Loans and Crowdsourcing
Find an investor with a complementary skill set to your business
You cannot effectively launch a new business without expertise in several important areas, such as technology and marketing. Why not look for those skill sets among friends and family? They will likely relish the opportunity to participate in your venture’s success. Maybe you could even sweeten the pot by offering a commission based on the business’s success. The bottom line is that by eliminating such costs, you will enhance your chances of being a successful entrepreneur.
So, what happened with the golf ball/lemonade business? Well, the golf course didn’t take too kindly to me operating a for-profit business on their golf course, and they shut me down. But not before I made six months of allowance money, which gave me the capital to start my next business.
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