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The 2Fs – Family and Friends – Another Reason Why Equity Crowdfunding Rocks.

Eureka is the word that comes to mind when a bright idea for a new business venture clicks and you are confident that the market will accept this with open hands. To get going with this new and innovative profit making venture you as an entrepreneur, say startup company need funds or initial investment to float the company. What do you do? Where do you get the funds from? How do you go about with your new thought or idea?  Research shows that till the current date more than 74% of the new ventures are set up by taking help from immediate family and friends. These are the people whom you must have first said about your plans to start out anew. It’s your confidence added to the emotional factor of bonding which makes them invest in your endeavors.   Tetsuro Miyazaki from KRNWTR states “if not even your friends and family will invest, who is then going to invest in your company? ” So before you open up your crowd funding campaign to the public, you should demonstrate to the people in your direct network.

The first phase of a crowd funding process is characterized by a quick and significant flow of investments from  family and friends, which reaches approximately half of the target capital. After this first share of target capital is obtained, people outside your direct network see that others believe in your project and will actually consider to financially support you as well. This is confirmed by Robin Slakhorst from Symbid, who argues that 20-50% of the final capital is collected through direct relations.

 

If you’re determined on raising money from friends and family, proceed with your eyes open. And one excellent path to take is to structure the money as a loan or in some cases equity or returns on investment in cash or kind. The investment made by family and friends is also called pooled investment or family pooling. You have to explain that by being more conservative, one risks losing out on market gains and jeopardizing existing savings.  You should always explain to the givers or donors in this case family and friends the risks and benefits of Limited Liability Company (LLC) or Private Limited Company which you intend to open. It should also be made clear that even if the enterprise is successful and you start getting dividends, it could be difficult to withdraw your initial investment. A person should be prepared to wait a minimum of five years before he or she has any access to capital or cash flow. You should show and explain a full written business plan complete with a business description, marketing plan, financial plan, market analysis and a SWOT (strengths, weaknesses, opportunities and threats) analysis.  A good exit plans should always be there and the benefits of which should be explained well in advance.

It’s usually difficult to find ordinary people to invest in a private business unless you’re a known local business player and are in-tune with the business. But since people have invested in your company and shown faith in your ability to grow and you have recorded steady market growth it will not be difficult to find an Angel investor and seek the help of Crowd funding to grow the business substantially. Once the business gains the momentum with the help of immediate relatives and friends you can opt out for more investments via crowd funding.

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A growing business will grab the attention of the masses and it won’t be difficult to get access to the required funds with the help of reliable crowd funding sites. The funds that are raised will give a massive push to the existing business and the gains will be enjoyed by the family members and friends who have done the initial investment in the form of equity. Not to forget about the portfolio diversification to all involved. Then there’s always the chance that the whole group will get rich.