Have you ever wondered how difficult it is for startups to find early money? In this short episode of The Angel Next Door Podcast, host Marcia Dawood demystifies the friends and family round, shedding light on the challenges and potential solutions for entrepreneurs seeking funding at the very beginning stages of their journey. The episode is divided into three parts: raising from friends and family, alternative options for those without a support network, and the possibilities of non-dilutive funding. Marcia explains how entrepreneurs can structure their fundraising efforts, the importance of building strong relationships with potential investors early on, and the benefits of leveraging non dilutive funding sources. Listeners are encouraged to approach funding with the right mindset and effectively communicate with investors throughout their entrepreneurial journey.
Have you ever wondered how difficult it is for startups to find early money? In this short episode of The Angel Next Door Podcast, host Marcia Dawood demystifies the friends and family round, shedding light on the challenges and potential solutions for entrepreneurs seeking funding at the very beginning stages of their journey.
The episode is divided into three parts: raising from friends and family, alternative options for those without a support network, and the possibilities of non-dilutive funding. Marcia explains how entrepreneurs can structure their fundraising efforts, the importance of building strong relationships with potential investors early on, and the benefits of leveraging non dilutive funding sources. Listeners are encouraged to approach funding with the right mindset and effectively communicate with investors throughout their entrepreneurial journey.
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Marcia Dawood
Hi, everyone. Marcia here, bringing you a quick episode about demystifying the friends and family round. Now, I'm going to break this down into three parts. We're going to talk a little bit about actually raising from your friends and family. Then we're going to talk about if you don't have friends and family to raise from. And third, we'll talk briefly about non dilutive funding for companies that could qualify, and that is how they could get started. All right, so let's start with you have friends and family that you could potentially raise from. Angels come in early, but this friends and family round is truly, truly the earliest point.
If you are an entrepreneur that really believes in their product, going to people you know is the best place to go first for funding. Now, I've heard entrepreneurs say, well, I'm not really sure I want to take money from my friends and family. I'm not sure that my company is going to be successful. Well, that's not a very good thing to say if you're now asking angels for money, because if you don't believe enough in your product to have somebody that, you know, invest in your company, then Angels don't want to invest either. So, as we're talking here in part one about you do have friends and family that you could go to. How should you structure it? Well, probably the best thing to do would be to raise money from them using either a convertible note or a safe. This is because you don't necessarily so early want to be pricing the round, as we call it, where you're going to establish a price per share, which would mean that you would be putting a valuation on your company, because likely you aren't very far along yet and you're still trying to hit some of those milestones. So most of the time, entrepreneurs will start by taking some money from friends or family in the form of a convertible note or a safe.
A safe, for those of you who aren't as familiar, is a simple agreement for future equity, which is sort of like a note, except it's not considered debt, and we can have another whole episode on that. But anyway, so it's a way that you can take money that you would be able to put right in your bank account immediately and start using, and you would also have some type of an IOU back to the person who had given you the money. Now, one thing to be a little bit careful about is this could make holiday gatherings somewhat awkward or uncomfortable if over time, you aren't making the type of progress that your friends and family were anticipating. So always best to keep everybody in the loop. Communicate often and regularly about everything that's going on within the company. So now let's talk about if you don't have friends and family to go to either, they're not able or willing to help you. So this is a place where self funding is helpful. It might take you longer because you may need to have to keep a job during that time.
You'll have to be super scrappy, but that is possible. The other thing would be to find a champion, an angel who is very passionate about whatever it is that you're working on, whatever big problem that you're trying to solve. And regardless of whether you're looking for that champion early to try to help with funding, it is super important to be building these relationships at the very, very beginning of your journey of being an entrepreneur. At the end of August 1 of my fellow Angels, Sue Bevin Baggett and I wrote an article in Fast Company about this very topic on building relationships early with potential investors. Angels don't like to get messages, especially on LinkedIn, that say, hey, I need $50,000 for my company. That's ridiculous. Don't do that. Building a relationship with potential investors early is what is going to help you down the road to get the funding that you need.
But if you wait until you actually need the funding, that's going to make things extremely difficult. Much better to build a relationship while you're talking about what you're doing, the problem that you're solving, and the types of solutions that you're bringing to the table, so that angels feel more engaged with you along the way. And the third thing, depending on the type of company you have, is to look for the nondilutive funding that's out there, especially if you're in healthcare. A good example is like some type of a medical device. You might be able to get funding from NIH, the National Institute of Health, or there's a variety of places that you could potentially look for non dilutive funding, and usually that starts with getting some type of a grant. It's usually small at the beginning, but then there can be several phases depending on the types of milestones that you hit with your company along the way. Other nondilutive funding I've seen startups get is from maybe pitch competitions or different types of contests that they enter related to the type of innovation that they're working on. So this usually isn't as much as you would see maybe in the grant form, but it's still nondilutive funding, meaning that you do not have to give up any equity in order to get that money.
And Angels love to see nondilutive funding helping to build, especially at the earliest phases when you're really in that R and D, the research and development time when you're making the product, or figuring out exactly how you're going to deliver the solution to the problem that you're solving. I'll be sure to put a link in the show notes for the Fast Company article I was just referencing related to how you should be building relationships early with angels. I will also put a link to an article I found. It was from 2019, but it has some really great information in it about raising from friends and family, and it was put out by the Founder institute in the article. They have some great information about everything from how to value the company and how it's very difficult to place a valuation on the company. That's something I mentioned a little bit earlier. That's really why you'd use a convertible note or a safe they talk about understanding the different types of investments like we were just mentioning, and gifts. Sometimes friends and family really don't want to be an investor, but they're happy to help you and maybe that would be through some type of a gift.
Also, that would be considered nondilutive funding. Another important note would be you really want to be raising at the time that you are ready for the investment. I've seen too many entrepreneurs that say, oh, I just need money, I need money. If I could get money, I'll be fine and everything will flow together nicely. But that isn't necessarily the best time to be getting investment. Investment readiness is more important. You then won't come across as being needy and you'll have more proof, points of sales traction or third party feedback, whatever it is that you need in order to show that your solution is really quite viable. Also, having the right mindset is very important.
When you're self funding, you might make decisions that are different because you're only accountable to yourself. But once you have investors, now you're accountable to other people and it's very important that you have this mindset of knowing that you are going to have to give updates, you're going to have to talk about your financials, and you're going to need to be in a much different place than when you're just trying to build the company and self funding it. Building a company is hard work and it takes a long time. So making sure that you are communicating effectively from the very beginning with the people who are coming in as the first. Money is very, very important. One thing I don't see entrepreneurs do enough is use video to help get their message out about what is happening within the company to their investors. Sometimes they think they have to write these long newsletters or have a lot of information, make a different deck even to kind of show what the progress has been. Really, a quick video would be amazing, five minutes even of explaining where you are, what's happening, what's exciting, what's not exciting, what you need to do in order to get things to be more exciting.
And then what is your ask to the investors. And entrepreneurs, don't be afraid to ask your investors for help, especially when it comes to connections. I've seen a lot of really successful entrepreneurs get the help that they need from the people that are invested in the company by using their network, leveraging those relationships so that they can get to, I don't know if it's like a distribution center, maybe they are trying to get into target or Walmart or something like that and it can be extremely helpful. So make sure that you really get to know, especially at the earliest stages, the investors in your company and who they know, what they do and how they can help you. I hope you enjoyed this short episode about raising money from friends and family. Be sure to check out my website at www.marciadawood.com for book recommendations, tips and tricks, and all kinds of fun things. Thanks for listening.