What is a friends and family round?
Angelica A.
November 2, 2020
  |  

What is a friends and family round?

Angelica A.
November 2, 2020
  |  
Company Forensics - Learn from the mistakes of VC-funded startups | Product Hunt

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The promise that lies behind the question of what's a friends and family round? is a helpful answer. How to raise a friends and family round is a matter of getting loved ones around us to trust our business decisions. And that's possible by speaking to our circles of people clearly and showing them that we care about their contribution as much as doing everything a business needs to ultimate perfection. It's best, even, to work under the premise that there be no hard feelings at any point. But let's tackle the question that brings us together head-on, shall we?

What is a friends and family round?

Friends and family funding rounds are very common as a means to start a business. They are, quite simply, rounds of funding where our friends and family are the ones putting all the bills together to help our companies get started. 

At times, it can be easier to get friends and family to trust us regarding business ideas than any other source. And it's so to the point they're willing to put their money at risk rather than letting it sit in a bank. 

The amount raised during this kind of round will vary greatly depending on a founder's friends and family. Be careful on this round and value the inversion friends and family are making. It helps to be aware at all times that their investment is founded on the level of trust they're placing on you and your business idea. 

Strategies for a friends and family funding round

There are different strategies you can use to pull off one of these rounds. A personal chat with some of your friends and family is probably the most usual one. It tends to get them involved in the process. But there are other ways around this, too.

For example, think of sending out mass emails. Or get people together for an event in which you present your startup. Use social media platforms wisely, too. And there's much more. 

Be creative when you come up with your own ways of calling on your own. The most beneficial aspect of this kind of audience is that you know these people better than most. 

To help brainstorm, you can show friends and family that you value their contribution in different ways. Get them personally involved in the company. Ask them for advice.

When you treat these (and all) connections right, they might come back to provide more funding in the future.  

What early-stage startups need during a friends and family round

Raising a friends and family funding round should be a strategic step in creating a startup or new business. As we mentioned before, if you treat your funding sources right, they can be tempted to invest more in the future. 

When friends and family invest in your startup, keep in mind that's still a valuable investment like any other kind. Make it clear as you finalize contributions if they're a gift, loan, or people hope for an equity investment. Create a legal document for this exchange to protect your company as much as your backers. 

Create a business plan

Some people might be willing to give you money, no questions asked. Yet, more often than not, you'll want to show those around you that you know what you're doing. And, while our CEO has written extensively about why it's not a good idea to write a business plan, having one is a massive part of that promise you're making. Have a clear path of where your business is going and how funding money will achieve those goals. Even just those 2 pieces of information can make a founder much more trust-worthy with an investment in a company.

We wouldn't advise anyone to spend countless hours coming up with an obsolete 40-page document hardly anyone will read. But we do vouch for a vision that gets your business where you need it. 

Be frank about risks

Especially with friends and family, you want to be entirely honest. Listen to what your backers have to say and be willing to put your own money into your business, as well. 

Doing so can show others how serious you are about your new business plan. When you're putting it all out there, it's more likely others will trust you're making the best decisions for everyone.

How to best spend "friends & family" funds

As we said and handled strategically, money from friends and family can be foundational to a new business's success.

For that, think very wisely about what you need to achieve to get your business off the ground successfully. Seek to clarify that for yourself as soon as possible. How much money will you need for your first stage? 

Usually, friends and family rounds can raise anything from 10 000 to 150 000. The difference lies mainly in the people around you. Get priorities straight when planning what to do with which amounts of money. 

A friends and family fund will only take you so far before you move on to the next round of funding. Make that transition part of your goals. Bring in a new employee or rent much-needed physical space with this first set of funding, for example. Focus on what'll make your business operational with as little money as possible. 

On this note, think more about how to do more with less than raising tons to do a little.

Also, definitely go over convertible notes with legal assistance if your friends and family want equity in your business.

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