By Neil King
Funds are always welcome, but what are the pros and cons of asking family members?
Family seems like an obvious place to start
Well, they are often the closest people to you and your idea, so they are sometimes the most logical people to turn to first. They are also the ones more likely to take a punt on a new idea, wishing to show support to a son, daughter, brother, sister, or whatever your relationship may be. But don’t forget these people are not lending institutions – they are people who are close to you who may not have experience in investing, or the kind of money you’re looking for. So play it carefully.
I’m a bit scared to ask them
That’s natural – you’re speaking to your family, not investors or banks. It’s a big thing to ask for money. You can’t be sure they have the funds, or what their reaction will be, and they may even reveal a lack of belief in your business. But fear shouldn’t hold you back – how will you know if you never ask? If you have a lot more to gain by being bold. There are many advantages to be had.
And what are these advantages?
One advantage is that family might be more prepared to take a risk than investors and banks would. They won’t necessarily have a long list of requirements and conditions to meet, basing their decision on more emotional foundations. It is also usually a quicker process with family, as long as the funds are available. Family finance rounds also signal confidence to outside investors – belief breeds belief.
But what about the disadvantages?
Here’s the problem – there are several. First of all, there’s an emotional aspect, but there are other things you need to be aware of. Unless they also happen to be investors in their day job, family members might not understand how much of your business they are entitled to. They may expect more than they should receive, which causes problems. They may also not be business minded, and try to dictate how the business is run without the appropriate know-how. You may also have to face dilemmas about what to do if one of your family investors suddenly requires financial aid themselves, for example.
Might our relationships change?
Yes, absolutely. The dynamic has the potential to change enormously. For example, you might feel beholden to them in some way, they might track your every move, if the business starts to sour it could lead to animosity, and what was once a strong bond might all of a sudden be little more than a business relationship. Conversely, things could change for the better. Your family might be more interested in you and your ideas, they could be pleased with the rewards their investment brings, or you could end up gaining from their various expertises. Either way, brace yourself for some form of change.
So, how do I approach it?
It is probably best to approach the issue as you would with an outside investor. Be prepared, have a solid business plan, show them how their money would be used, explain your credentials, and be straightforward. Don’t be scared to ask for the money you want – if they can’t afford it, they’ll tell you. Be upfront about everything so there are no nasty surprises, and select your targets well. It’s not an easy process, and you may have to deal with rejection, but if you’re honest about your plans and needs, then it’s only fair to let them be honest about their feelings towards the request for funding.