Are You Considering Investments From Family For Your Start-Up?
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Are you buzzing with a new million dollar idea for a start-up?
Can’t wait to implement it?
Looking for project funding ideas?
The question in your mind is – should I ask my family and friends to help in financing the idea?
If you are going through such a dilemma in your brain, you must outweigh the pros and cons of having your loved ones involved financially in a project, the success of which is highly uncertain in this insanely fierce competitive market. It’s a proven research that almost 80% of the start-ups fail within a year. Having read that one must not be too hasty in the decision of the most important step of establishing a business, i.e. financing.
Why does it seem lucrative to be funded by friends and family?
For a few simple reasons you might be tempted in seeking financial assistance for a start-up from relatives:
· You are sure to get respite from the technical and legal implications of seeking finance from outside agencies.
· You do search for funds in the market but none of the big financing houses want to backup a project which isn’t established yet, or which is relatively small scale, or which is not too sure of giving higher returns.
· It’s a safe, time tested funding strategy to involve your college friends or siblings in your start-up idea.
· Family and friends are more likely to get carried away by your ideas and would be readily available for help, even if it involves investing their retirement savings or contingency cash available with them.
· It depicts a better market value because it shows that the family is well grounded and is already supporting the business plan. Mr. Ashish Gupta, for example, opted to seek financial help from his father for setting up his new unit, Reva Enterprises. Without much complication, finance was readily available.
What are the downsides of family funding the start-ups?
· Risk lifelong savings
It might happen that the over generous family has lent you their pension or retirement savings or a friend lends you the money accumulated for his/ her daughter’s higher education in good faith. It wouldn’t be justifiable until you are too optimistic of secured returns.
· Lack of deep-domain expertise
Just because finance is readily available, it could be detrimental to your business decisions on the contrary. These friendly investors might impose peer pressure in any decision you take or too much interference regarding frequent updates might be irksome. Worst could be that these not-so specialized benefactors might start considering themselves partners and indulge in the day-to-day planning.
Now that his father financed his unit, Mr. Ashish Gupta confesses that there would be undue clash of opinions, whenever he (dad) would propose a growth strategy or any suggestion in the day-to-day working.
· Lose the money and lose the loved on too
With the market volatility and cut-throat competition, if the start-up fails, you will lose all your money and hopes, and worst of all, lose the relation who so dearly trusted you.
· Legal implications
In eventuality of any failure, the chances are quite high that the friend/family sues you legally on grounds of fraud or breach of contract. This would be a nightmare being sued by a loved one.
What must you see while considering investment from friends/family?
Now that the idea of a start-up looks promising and you are determined to risk yours and family’s money, make sure to keep in mind the following factors:
1. Make sure that your folks, who have invested, receive the same benefits as an outside investor.
2. As a principle you must involve your own money too. This will tranquilize any anxiety your friends have regarding your intentions and the success of the project.
3. Professionalism is the keyword in all that you do. In connivance with this, update your investors about the project frequently, be transparent in all ideas, and do not pitch an ‘all is perfect’ image.
4. Mr.Anuj Gupta preferred to opt for secured loans for his family investors and gives them interest on a yearly basis, rather than taking money in form of gifts. This gives his investors security in form of regular income.
5. Make sure you tell your investors any flip side you see in the idea and give a true forecast of the project plan as well as expansion plans.
6. It’s best advisable to opt for a professional financing agency which will render you expertise and advices on decisions based on their experiences.
7. The safest bet is to document each financing transaction and keep a written record of all the funding sources. This is highly professional and would portray good intentions.
Last words-Howsoever lucrative and profitable the start-up idea appears, never make a hasty funding decision because money can mar and hamper relations. Consider the pros and cons of all funding options available in the market as well as self-financing and then consider the right mix of debt-equity. Given that the start-ups have a high failure rate, you must do extensive market research and plan judiciously.