When we want to start a business that requires some upfront capital which we cannot entirely afford, some of us will often ask our family relatives and friends for money.
As you might already know, this approach is usually called “the three F’s” or “FFF”, which stands for:
Friends, Family and Fools.
Being totally transparent with you, I really dislike this expression, as it always makes me think of how the human being can be a carpetbagger.
It is undoubtedly easy for some people to ask for money to their relatives or friends. After all, they are the closest persons; they like us and are willing to help us when we need.
That’s also why they are called “The Warm Circle.”
However, what we tend to forget is that a family member or a friend is not the same as a professional investor.
What does this mean? What’s the difference between the FFF and an investor?
You see, investing money in startups is considered to be Risk Capital, which, according to the BusinessDictionary.com, stands for:
“Equity capital of a firm against which all losses are charged and which takes the full brunt of the effects of failures, misjudgments, uncertainties, and adverse circumstances.”
Complexities apart, it is the same as saying that an investor understands, by default, he might never have a return on his investment. In fact, he knows there’s a high chance he will lose the money entirely.
Because at the same time, he is investing in ten other companies, expecting one of and one of these will skyrocket and give him enough return on investment to overcome all the other nine losses.
Also, I’d like to share that not anyone can be a Venture Capital (VC) investor. I mean, if you have a fortune you can indeed become a Business Angel and invest in early stage startups, but to become a Venture Capital you need to have a fund, which is assembled with the money of several other private or public investors who decided to put their money in your hands.
Naturally, to receive the money from these investors, a VC must have a bullet-proof track record to earn their trust.
I don’t want to go off topic too much, but it is important to share with you a brief overview of how the VC’s world works.
Now, you can have a clear picture of what’s the difference between a regular person who has some accumulated savings and a professional investor.
Basically, your family relative or friend who lends you the money is:
- Risking his own money
- Expecting to get the money back
- Possibly dependent on that money to have a nest egg
- Solely investing in your company – admittedly, he’s not building a capital risk portfolio
Unfortunately, some entrepreneurs do not seriously take into consideration these issues when they initially ask for the money.
I’d like to call your attention to the problems that may arise from accepting money from a close one and not keeping up with his expectations:
- In a best case scenario, the lender won’t mind giving away that amount of money as a gift (which is not supposed to be common)
- In general, you can seriously shatter vital relationships if you do not return the money. Some friendships are broken apart this way. Even if the lender tells you it’s fine to take his money, he might get disappointed with you without letting you know.
So what can you do to raise funds actually within your Warm Circle and avoid that your lender feels like a fool, at the end of the day?
Here are the four landmarks you should always remember.
#1 Make sure the lender does not need the money
#2 Clearly inform the lender he might lose the money
#3 Update the lender periodically and be crystal-clear
#4 Return the money ASAP
Conclusion: why we want to avoid any possible conflicts
STEP 1: MAKE SURE THE LENDER DOES NOT NEED THE MONEY
The first thing you can guarantee is that you do not ask money to someone who might need that money later on.
Now, it isn’t always easy to grasp whether someone will be in a difficult financial situation in the future because life is many times unpredictable.
What we usually do
We perform a first triage in which we select the primary “candidates” to whom we want to borrow money, and then we gently ask them to support us and our project, right?
If this is your case, let me quickly share this trick with you:
When you ask someone for their money, pay close attention to their body language. This is the crucial moment. If you detect even the slightest bit of discomfort, step back immediately and withdraw your request.
Why would you do this?
Well, this person might end up lending you the money, because he will eventually realize how much he treasures you and that you will surely make the best use of his money.
However, you don’t want them to have to think about it, do you? If they need to reason, it’s certainly because they are pressured by your question and have doubts that lending you the money is a good decision.
Or, perhaps, they might be afraid of losing their nest egg. Nonetheless, they still decide to lend you the cash.
Instead of this, let me tell you exactly what I think you should be aiming at:
You should seek at receiving money from someone without even having to ask for it.
Here’s the trick:
When you pitch your business idea, you should present it with outstanding enthusiasm and clearly, show that you genuinely believe this is a great opportunity for you and a serious step in your life.
You should also take the time to state that you’re actively looking for someone that believes in your potential and can help you with the money. Otherwise, you’re afraid the project will never see the daylight.
And all this, without giving the idea that you’re asking for money; it must be extremely informal.
But a warning: please do not look at this as a romantic novel in which you’re a bad guy trying to deceive someone; you’re acting to make sure you perfectly understand this other person won’t absolutely need the money. It is for a greater good, after all.
What’s key here is that if someone likes your project, trusts in you, and has enough financial stability to lend you some money, he will have the initiative to let you know that he would be happy to help you.
You should always aim at this scenario to avoid asking for money to someone who cannot easily afford it.
It is the only way to guarantee it is the lender’s initiative to place his money at your disposal.
STEP 2: CLEARLY INFORM THE LENDER HE MIGHT LOSE THE MONEY
Ethics first, always.
So you finally have someone that is willing to give you some money to help you starting a business.
Guess what? You’re one step closer to building your dream business!
Now, what’s the next step? Reaffirming that the lender might lose the money.
Even though you didn’t ask him directly for the money and it was his initiative to help you, it is paramount to highlight that, at the end of the day, this is risk capital.
You don’t exactly need to use these words, as long as you see in your friend’s face that he clearly understands what he’s getting into.
Also, you want to transform this moment into the closing statement that will give you the money.
Let me tell you how:
First, show your friend that you’re thankful by his proposal and that you feel tempted to accept the offer because it is what’s separating you from your dream – well, that and a lot of hard work. 😉
Secondly, guarantee that he’s aware there’s always a chance he might end up losing the money, no matter how afraid you are that your friend steps back with his previous initiative. Ethics first, always.
Now, it is the time to close the deal:
If you really trust in the project and your capabilities, you should now underline your absolute commitment and willingness to return the money as soon as you have the correspondent profits. Be transparent from the beginning, tell your partner how long you expect it will take to give back the money entirely.
And finally, wrap up the conversation with a killing statement such as:
“I’ve been seriously studying this project for such a long time already, and there’s definitely a tremendous market gap. Besides, I’m going all in this project with no backup plan; I know this is what I must do. I’m really thankful for your initiative in supporting me, and I’ll always do my best to be up to your trust.”
Well, the way you say it should vary according to the type of conversation you usually have with this person. You can copy my words or create your own, it is up to you, as long as the lender see’s that you are up to his trust and thrilled with the opportunity he’s giving you.
STEP 3: UPDATE THE LENDER PERIODICALLY AND BE CRYSTAL-CLEAR
When we’re running a busy, it is easy to get lost within the hundreds of issues that we need to overcome each and single day.
Quite often, you will be completely submerged into the business operations, and you won’t even remember to update the guy that initially gave you the money to start your business.
Now, I’d like to recommend you to schedule a periodic meeting with your lender, because you might see this person very often but, perhaps, you don’t have the time to keep him updated with the status of the business.
It doesn’t necessarily matter whether it is every month, two months or three. The important is that you schedule the meetings and make them happen.
In these chats, your primary goal will be to keep your investor completely up to date. What are you guys doing, what will you do next, what’s going well and what are your pain points.
Naturally, we expect that everything works out with your business, but because I know from experience that there are times you can hardly sleep at night, I’d like to suggest you openly share those concerns with the lender.
You want to manage his expectations regularly, so you avoid situations like those when your investor thinks everything’s going great, and suddenly someone tells him you just closed your business.
Just imagine how would you feel if you had lent money to someone who wouldn’t even have the consideration to inform you that his business was going to bankruptcy. Would you trust someone like this?
STEP 4: RETURN THE MONEY ASAP
Finally, the last step: returning the money.
When you ask someone for cash, you shouldn’t expect that person to forget completely about it. Even if he doesn’t tell you to return the money, please assume he is not giving it away, and that, of course, he’d like to have it back.
Also, there are a couple of reasons why you might be interested in returning the money as soon as possible. Those aren’t always straightforward:
You can benefit from consolidating your credibility
Every time you deliver what you’ve promised, your credibility grows. Even though we expect everyone always to fulfill their pledges – otherwise we wouldn’t trust that person in the first place – we all know some guys will default.
Either because he seems to forget or because he wants you to forget, often promises are not delivered.
So when we see someone standing up for a pledge, we internally applaud.
This is the type of credibility boost you can use to consolidate your personal brand.
And it is naturally necessary.
It means this person will most likely be open to help you again in the future because now he is sure that you keep your promises and are trustworthy.
Make your best to return the money while the company is still small
You see, even though you are close to the money lender, whether he is a friend or a relative, you know that all human beings have a tendency to hunger for what comes easy.
Let’s assume you already have the means to return the money to your lender, but you decide not to do so, to have more capital to invest and scale your business faster.
If your company grows a lot, what do you think this guy might do? He can be the best person in the world, but, come on, it’s such an easy way to earn money, all he needs is to ask you for some money.
Remember, he is the one who helped you in the beginning when you had nothing. He trusted in you when no one else did and, for a matter of fact, his money is still invested in your company. For sure he expects you to help him now too.
Evidently, this is an opportunity for him to leverage his earlier aid and make a quick buck. It all depends on your business’ size, but if you manage to build a seven digits’ valuation business, the euros might start sounding too high.
This is fascinating to me because, in the beginning, he lends you the money, but he actually never expects you to create this outstanding and successful company. When he realizes what he can make by exploiting you, it’s pretty possible that he will look for some financial return – a one-time thing or periodically.
Yes, it seems I’m too skeptical about people, that perhaps I don’t trust human beings that much. Well, it might be right, but usually, it’s precisely the opposite. Personally, I always defend you should trust people, even though you might regret it from time to time; but on average, it highly pays off.
However, my advice in this particular matter is just to return the money to your lender as soon as possible. The sooner you have that amount of free cash flow, make sure you pay to the person you borrowed money, even if that means delaying a while your business’ growth.
I don’t know about you, but when running a business, I wouldn’t like to have a familiar relative trying to exploit its potential and getting a stake of my daily focus just to handle this issue.
Also, if you don’t handle the problem with caution, once again, you might cause a rupture in the relationship, which we ultimately want to avoid.
CONCLUSION: WHY WE WANT TO AVOID ANY POSSIBLE CONFLICTS
Creating a company and growing a business is undoubtedly challenging.
I know that when you’re running a business there are hundreds of problems you have to handle daily and dealing with your lender might seem a waste of time to you.
I get it, but I’d like to call your attention to the fact that many times in life, as you know, we face little issues that seem irrelevant at a first glance, but after some time they escalate into major bottlenecks, only because we didn’t conveniently address them in the first place.
Multiple authors refer that we all have a limited daily quantity of decision-making capability. Did you know, for instance, that you decide approximately 35.000 times a day?
Well, if making decisions burns your daily mental capability down, then you want to ensure you’re saving all your resources to the business’ critical decisions, right?
You don’t want to spend your mental resources on dealing with people or things that have nothing to do with your company’s future, such as arguing with an opportunistic, selfish dude that is trying to use you to make some bucks.
An interesting fellow (cannot remember the name) once said the company’s tasks could be divided into three broad categories: Future, Present, and Past. Below you can see the different types of functions:
- Future: strategy, business development, marketing, sales, product development, pricing.
- Present: operations, logistics, HR processes, management control
- Past: accounting, legal
In which category do you think the company leaders should be?
In the Future-oriented tasks. Business leaders and founders should stick to the tasks that are directly related to the sales and growth of the company.
Now, one of the things I’ve learned running a business is that you don’t want to underestimate the importance of the past-oriented tasks, such as legal and accounting.
If you do not address these matters carefully, one day they will end up falling back on you and, from a sudden, you will be spending more than half of your time managing legal disputes that contribute absolutely nothing to your business.
You may wonder what does this have to do with receiving money from someone close to you.
Here’s the connection: when you ask for money to bootstrap a business, you’re establishing a trust-based contract with the lender – this guy lends you money to help to create the business, but it is not a give-away, he expects to have the cash back in the future.
You want to guarantee that you have a good relationship with someone who gave you money because any dispute you might have with this person will only represent a thorn in your side – a Past-type issue you will have to address personally if you consider this relationship is significant.
The problem is: when you’re running a business, there will be enough challenges blocking your mind; there’s nothing you can do to avoid them. You have to worry about taxes, dealing with accounting, helping your lawyer with any legal dispute, etc., and you surely don’t need one more thing stressing you up as all these concerns will only exhaust you, day after day.
That’s why I hope this message might help you avoiding some traditional mistakes people do when bootstrapping a business.
Ultimately, if you want to borrow FFF money, just make sure no one ends up feeling like the third F.