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Tap Into Your Network for Business Funding

Looking to raise capital for your new business? Start by approaching the people who know you best.

If your face appeared on the 10 o'clock news, how many people would say, "I know that person"? The list is probably longer than you think--and more than you'd imagine could be prospective investors in your business.

Making a List
Your first step in finding investors among people you know is simply to draw up a huge list of names, including your family, friends and beyond. You're in search of people with whom you already have a trusting relationship, or with whom you can establish one.

Start with your inner circle--parents, grand-parents, siblings, aunts, uncles, cousins, in-laws, close friends and neighbors. Your middle circle includes people whom you currently and regularly have contact with--business associates, fellow volunteers, members of your church or temple, current or past co-workers, supervisors or employers. Also think about any potential business mentors or entrepreneurs, people who may have good information about the kind of business you're in and whom you either already know or could get to know.

Finally, your outermost circle reaches to past contacts, friends or acquaintances you rarely see, and people you know only through someone else. These people should either know your name or recognize and think highly of a mutual acquaintance. Think back to teachers, college friends, mentors, professors, coaches and others who might have an interest in seeing you succeed. If you know any angel investors--affluent individuals with experience and an interest in helping new businesses get started--add their names, too. Skim through your address book, e-mail database, holiday greeting card list, old school yearbooks, alumni directories, employee rosters from old jobs and even party invitation lists.

Don't reject anyone at this point. If your list feels short, ask a trusted friend or colleague to help out.

Next, evaluate each person on your list in terms of the following four characteristics:

  • Trust in you
  • Ability to afford the investment
  • Business experience. Entrepreneurs are actually the most likely to invest in other businesses.
  • Lack of emotional baggage. Cross off anyone you feel nervous about entering into a financial relationship with.

Draw up a list of your best bets--people with at least two of these characteristics. Include columns for each person's name, a brief description of why the person appears to be a good prospect, and the best way to contact the prospect.

Evaluating Each Prospect
Once you understand what makes each prospect tick, you'll be better able to craft an appropriate proposal. The two cards prospects bring to the table are their experience with business investing and comfort with the idea of mixing money and relationships.

If your prospect has ever made other private loans or investments, started a business, worked in a senior position or invested in the stock market, consider him or her savvy. If the prospect has not done any of these things, consider him or her inexperienced. You'll have to explain your request more clearly to inexperienced prospects and educate them thoroughly about the potential risks and rewards of the investment.

Would your prospect think of an investment as a business transaction or consider it part of your personal relationship? If your prospect doesn't appear worried about mixing money and relationships, consider him or her analytical. If he or she fears that providing money for your venture could damage your relationship, consider the prospect worried.

You can divide prospects into four types: savvy and worried, savvy and analytical, inexperienced and worried, or inexperienced and analytical. Each type of prospect needs to be handled differently.

With savvy and worried prospects, you need to alleviate their sense of emotional risk. Carefully explain your plan for repaying the investment, including your month-by-month obligations and how you would handle any missed or late payments. With savvy and analytical prospects, present your request with the utmost professionalism. Include a detailed explanation of how the investment will play out and what kind of return you're offering. Make the investment process as easy as possible.

With an inexperienced and worried prospect, carefully consider whether it's even possible to alleviate the risks from this prospect's perspective. If you decide it's worth approaching the person, explain that the best way to protect your personal relationship is to make the agreement almost as if you were strangers--to set it up and manage it in a businesslike fashion, with signed, legal documents and a repayment schedule. (You probably won't encounter many inexperienced and analytical prospects--they are rare.)

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Asheesh Advani is CEO of Covestor, an online marketplace for investors. He founded CircleLending, which was acquired by Virgin.
 

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This article was originally published in the August 2006 print edition of Entrepreneur with the headline: Friends With Money.

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