Tapping Friends and Family for Small Business Financing

Bootstrapping for early staged business is generally the only method of small business or start-up financing.  Bootstrapping can come in many forms but usually has its greatest impact from tapping friends and family for investment dollars as it is these people that know you the best.

I hear all the time from budding entrepreneurs that their family or close friends don’t have any money to invest.  And, I am sure that this is the case for most new business owners.

However, while those closest to you may not be in a position to invest – there still remains a vast friends and family network at your disposal – a network that extends outward from your immediate circle by several degrees of separation.

I incubated a company that, when it first started, it focused its financing efforts on the people that their friends and family knew.  This is essentially a one degree of separation from their immediate circle.  The company founders begin to pitch and tap, not people that they personally knew, but people that their friends and family knew.  The company was able to raise an initial $1.4 million by tapping the friends and family of their inner friends and family circle. On the other side, the investors were also happy with this arrangement as they received this referral from people they knew and trusted – your friends and family members.

Within a year this company, having burnt through their initial cash, began the search for financing again.  However, instead of going back to the same well or directly seeking professional investment, decided on another approach that extended the degree of separation from their inner circle.  This time the brother of one of the founders began to renew contacts with some of his old college buddies.  He ended up contacting an old college friend who knew a person that was related to a major investor from the San Antonio, Texas area.  This one contact landed the company a $2.5 million Series A round of financing which eventually provide the company enough funding to get them to profitability.

The bottom line here is that even though your immediate friends and family may not have the wherewithal to invest directly - they may know of others who do and will.  The thing to think about is that most of the people you currently know or have known from the past (i.e. from past jobs, from primarily school or college or even from civic or social groups that you may or have belonged to) may have contacts (from their jobs or social groups or college days) that can either invest in your company or lead you to the right investors.

So, while you may know that your inner friends and family circle may not be able to invest in your company – it never hurts to ask them who they may know.  At the very least, it never hurts to dust off those old school chums contacts to see what they have done with their lives and if they or someone they know is looking for new investment opportunities like the one your company presents.

When bootstrapping a business idea that you believe in, raising needed operation capital is really all up to you and how much effort you are willing to put into it.  Swallow your pride and start asking for investment; if you don’t ask - you will never receive.