My family emigrated from Lima, Peru to the United States before I was born to give me a shot at the American Dream. I owe everything I’ve achieved so far in my life to my parents, which is why it’s my goal to support them financially as they get older.
Somewhat paradoxically, to achieve this goal, I raised $5,000 from my mom to start an online affiliate business for U.S. tourism to Peru, called Professor Peru. The idea, of course, is to generate enough revenue to fund her retirement.
But after raising more than $1 million from angel investors, which required an executive summary, PowerPoint presentation and financial projections, I can attest to the fact that fundraising from family members is equally as hard, if not harder. The goals and fears associated with a family member investing in your business are a far cry from the goals and fears associated with a professional investor.
If you’re considering raising money from a family member, here are a few tips to make the process pain-free — and rewarding for everyone.
1. Understand their financial philosophy. My mom is very protective of her money and absolutely loves to save — before my startup she had never invested in anything. She would rather use her money to pay off the mortgage than take a gamble on a business that might fail. My mom’s philosophy is “Save now, invest never.” At that time, convincing her to invest in me was a challenge to her very view on money.
2. Build trust by showing examples of success. To overcome my mom’s knee-jerk reaction to investing her money, it was important to show her clear evidence that success is possible with online businesses. I spoke with her at length about my good friends Cody, Sean and Chris who have built successful online businesses, as well as my own experience building startups.
3. Listen closely to investors’ concerns. The evidence intrigued my mom, so it was time to pitch her my idea of an affiliate business for U.S. travelers to Peru. Like any savvy mom, she immediately listed reasons why it might not work! I listened intently to understand the reasons behind her hesitation. I didn’t respond right away. Instead, I waited a day to talk about my idea again.
4. Address hesitation points. One of the biggest fears my mom had was that no one in the U.S. was traveling. The constant barrage on the news about an economic downturn had led her to assume that no one had the excess income to travel, which of course was untrue. To relieve this fear, I introduced my mom to 4 close friends of mine that had recently traveled to Peru. Seeing is believing!
5. Pitch the bigger vision. While you should certainly consider documenting your agreement in writing, you should also be able to clearly explain the benefits in big-picture terms your family member can appreciate. I asked my mom when she wanted to retire. I then asked her, “What if you could retire in 2 years?” Though she was skeptical, the seed was planted, and the possibility of an early retirement made her hopeful. Though I didn’t sign any official documents with my mom, your situation may be different if the dollar amount or risk is higher.
6. Make your ask. There was nothing formal about my pitch. I took my mom out to dinner to her favorite Japanese restaurant to ask for my funding. No financial spreadsheets, no PowerPoint presentations — just a mom and her son. Note: while Excel spreadsheets intimidate my mom, your family members may want to see detailed projections. In either case, if you can show a well-thought-out plan to spend the money and generate revenue, then you’ll be that much closer to closing the deal.
7. Give a clear timeframe. The pitch itself was a very small portion of our dinner, but I did make it clear to her that I needed to know her decision by Friday (giving her 2 days to make a decision). I’ve learned through years of pitching that the shorter the timeframe, the likelier your pitch will be successful.
The result? On Friday, I called my mom, and she told me she trusted me and that she would invest $5,000. And so far, so good – Professor Peru is going strong, with several new partnerships, and I’ve also started development for How to go to North Korea.
Have you ever raised money from a family member? What steps did you take to ensure that the ask was a success — for you and your investor?
The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.