MBA1910 Q&A Wednesday: How do I ask friends & family to invest in my business?

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Hey O. Welcome to the Hunter $100 MBA show, the business podcast that gives it to you straight every single day with our daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of Webinar Ninja, an independent software company I started back in 2014 with my co founder and today's episode is Q and A Wednesday. On Q and A Wednesdays we answer a question from one of you, one of our listeners. If you got a question you want to ask just go ahead and email me over@omar100mba.net Today's question is from Brian and Brian asks. Hey Omar, love the podcast and I am thinking about starting my own business but I need some startup capital. How do I ask my friends and family to invest in my business? Do I invite them over for a dinner and a pitch or do I approach them individually? I'm not sure how to go about this. Would love your take or advice.

Thanks so much Brian.

Thanks for the question Brian and I'm so glad you asked this question because many people that start a business will have this question themselves. They're looking for investment. It's natural to go to the closest people that you know, your friends and family to support you and to put their money and have a stake in your success makes total sense. And my answer to your question may surprise you. I'm actually not a big fan of asking for investment from friends and family. I actually think it's a bad idea. I think it's probably unnecessary for most businesses and I'll explain why. You may think you need startup capital, but I'm here to tell you maybe not. You may think it's a good idea to get your loved ones involved in your venture. I'm here to argue most likely not. But don't worry, I'm going to give you some alternatives. I'm going to show you real ways to raise capital and be able to build the business you want. So let's get into it let's get down to business.

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So Brian asks on Q and A Wednesday, how do I ask my friends and family to invest in my business? And I'm here to tell you that you should try to avoid this. Okay? And I understand the need for capital to start your business, but I'm here to tell you that you don't need to go down that route. And the reason why I'm discouraging you from going down that route is because it's expensive.

Okay?

Not only in terms of cash dollars, but in terms of relationships, in terms of what you're getting in return. When you get a investor that is not necessarily doing investments for a living, they're really not going to give you a lot of value outside the cash. They're not going to be able to advise you. They're not going to be able to help you. So you're actually getting a raw deal. On top of that, you're getting pressure and no from other people about what's going on in your business, opinions that may steer you in the wrong direction. Plus, if the business doesn't go well, it's going to be very hard for you and your family and friends to get past that failure. And this is just a reality of so many People I've met. Money can do crazy things to relationships. So you might be thinking, omar, okay, but how am I going to make money to start my business? Most businesses I'm talking about, 95% of businesses out there can start with very little capital, with very little money. I'm going to give you some examples, okay? What you really need is time and brains. You need talent, you need manpower. Okay, so let's start with the manpower part. Let's start with a talent. If you're building something that requires expertise and you need to hire expertise, why don't you give somebody equity in exchange for working for your business? This is a far better exchange for you as the business owner. Because they're invested. They need to work to see gains, to see profits. And you can come up with a very simple contract which requires them to put in X amount of work in order for them to get X amount of equity. A lot of people just need a few people to start a business. There are so many stories of businesses that started this way. Facebook, for example, started with a handful of students out of Harvard with $1,000 to buy a server. If Facebook was starting today, they would need less than $1,000. They'd need $100. The way technology is today. They were a smash hit across the country in several college campuses before they got their first dollar from investors or investor Peter Thiel. But say you're not trying to build the next Facebook. Let's say you're trying to build a restaurant. You're like, hey, I want to start my own restaurant. I. I need rent. I need furniture and tableware and signage, and I can go on and on. Yes, this is true, but this is not where you have to start. You don't have to start with the five star restaurant experience, okay? If you have a passion for what you do, for the food you create, in this example, the product you create, you can start somewhere you can afford. For example, if I was starting a restaurant, I would not start there. I would start with a table at my local farmer's market on Sundays. Cost me $200. I can scrap together $200. And I can cook my food, I can serve it at the table. It could be a way for me to earn some income. But more importantly, get some customer feedback, get some traction, feel what it's like to be an entrepreneur, to sell my products and services to real people that don't know me. That's where you start. Okay? You don't need a lot of money to start there. Because the funny thing is, that over time you're going to earn some money. And that table is going to maybe become two tables at the farmer's market. And then from there you might go to a food truck that's opened three days a week and then that food truck is open seven days a week and that food truck then evolves to a small little restaurant in a local strip mall and then from there it becomes an independent restaurant. The point here is, is that there's so many steps you can take before you get to this vision in your head, which is the end goal. This never is how any successful business starts. Okay? The way they start is they start simple. How did Nike start? Did they start by manufacturing 18, 20 different shoes themselves? They opened up at the store and started selling shoes. No, Phil Knight resold other people's shoes. He sold them out of his car, out of the trunk of his car. He sold tiger running shoes to runners he knew at his university. That's how he started. That's how Nike, the multi billion dollar company started. You can start small, and what's great about starting small is that you learn lessons along the way and you build and you start understanding what kind of entrepreneur you could be. You start to refine your product, you start to learn about your customers, your marketplace, pricing, etc. Etc. Etc. And for most businesses other than launching rockets into space, you don't need a lot of capital to start. You want to sell some physical products, let's say for example, with an E commerce store, well, there's lots of suppliers that will give you the stock and ask you to pay for it 60 days later. So as long as you could sell that stock within 60 days and make a profit, you can pay that bill. So you can start with a small order or better yet, start with an order that you can afford with your savings, a few hundred dollars and snowball that into the next few hundred dollars by making a profit and reinvesting in your business. Maybe at some point as you're growing your business and your expertise and now you have a track record of great clients and great business and your product is starting to get traction. You have product market fit, what they call. You're starting to have what's called escape velocity, right? And now you want to scale your business, you want to take on some funding, you are now in a far better position to get investment, okay? Whether you want to take on debt financing like getting a business loan from a bank or a grant, or you want to bring on an investor that's an actual investor, not your Family or friends that have never invested in anything before or have no business expertise that they can give you, you're going to get a better deal. You're going to get somebody who actually can advise you, can guide you, can mentor you. Now that you have the numbers, if you ever watch the show Shark Tank, the first thing the sharks ask or the most important question they need to know before they want to invest is how many sales have you had? What's your top line revenue? How many customers do you have? They want to know, does the market respond to your product? If they say zero sales, most likely. I mean like 99% of the time, none of them invest because it's too much of a risk. They don't know what they're getting into. If they invest, they are giving the product owner, the business owner, a raw deal. They're going to say, give me 90% of the business and I'll give you 100 grand, or something like that, because there's no valuation for the business because, hey, you haven't made a sale, we don't know what the value is. But the ones that do get investment are the ones that can prove they got a great product in their hand because the market says so. So you'd be in a better position to get investment from real investors that can offer you more than just money. If you start slow, if you start small, if you start getting some traction.

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To wrap up today's question from Brian. I totally understand you want to get going, you want to build your business, you're excited and you'd love to just jump right into it with a good amount of cash, good startup capital so you can just hit the ground running. But the cost of that can be very high. One of the things I learned from a lot of successful entrepreneurs is you need to covet your equity. Your equity is so important. So as soon as you start cutting the pie and giving people equity, you're diluting the value of the business. So even if the business is somewhat successful, you may not value it as much because your stake in it is not much. Let's say, for example, you build a business, you get some traction, you took that investment on and you had to spill up the pie. Because, hey, you wanted to get investors. Often the founders left with 10, 15, max, 20%. So if you're going away with 10% of your business and say, for example, your business does well and you go to sell it one day for, say, half a million dollars, really all you're getting is $50,000 out of that deal. You're going to devalue this business? Once you do the math and realize, I'm working all hard to build a business, sacrificing days and night, my life, everything for 50 grand, I got paid more every year in my old job. Maybe. You know, the point here is once you dilute your value or your stake in the company, you start to devalue the business itself, personally. So be very careful when you give up equity and you don't have to in most cases. You know, I mentioned, in most businesses, you don't need to spend a lot of money to start. Unless you're sending rockets into space. Well, even Elon Musk, founder of SpaceX, started SpaceX without investment. How did he do that? Well, he started other businesses prior to that, right? He had small businesses, used to throw parties at colleges to make money. When he was in college, he started an app called Zip2. He sold that. Then he started X.com, that then merged with PayPal. And then when PayPal got sold, he took that money and started SpaceX. So it's not impossible, but it takes time. Remember I said you just need talent and time. Well, this is what part of the equation you need to just give yourself time. Be patient. I say patient, but work on it, right? Get to work. Wanna open that restaurant? Grab that table at the farmer's market, at the flea market. Or save your money and start up with a little cash. Maybe instead of starting at the farmers market, you go straight to the food truck. The point here is that you have options, but you gotta give yourself time. Be patient. But while you are working on it, you're learning a ton. This doesn't mean you just sit on your laurels. It means you get going, but you just get going at a smaller scale. Thanks so much for listening to the hundred on MBA show, Brian. I hope that answers your question. I hope that my honesty wasn't abrasive. I just wanted to make sure that I give you the best answer I can give you based on my own experience. If you got a question you want to ask, just email me over at Omar MBA Net and I'll make sure to answer it right here on Q and a Wednesday. Before I go, I want to leave you with this. In today's economy, in today's world of incredible technology, we can start businesses right from our homes, right from our laptop, right from our phones. Really, we have so many resources, we have so many opportunity. It just requires you to work to put your time into it. Whether it's a side hustle or something you do on the weekend to get started, just start. The only regret I have in my entrepreneurial career is I didn't start earlier and I started 20 years ago. So there you go. Time can be your friend if you're working on your thing. Thanks so much for listening and I'll check you in tomorrow's episode. I'll see you then. Take care. Of.

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