If you would like to raise money from friends and family, know this: Your job is not only to show them a great business. Your job is to lower their risk.
That’s the advice of Mike Maples Jr., one of Silicon Valley’s most respected investors and co-author of a book on why startups succeed, titled Pattern BreakersHe co-founded Floodgate, a leading pre-seed and seed-stage fund whose investments have included Twitter (long before it was generally known as X), Twitch, and Lyft. And while he doesn’t invest in small businesses, he says the fundamentals of fundraising remain the same. Here, Maples takes you inside the mind of any investor—even if it’s your dad or sister—and how to make them feel comfortable.
Image Source: Zohar Lazar
Let’s imagine that somebody cannot afford to open a bakery on their very own, but doesn’t know how to ask their family members for money. What’s their first step?
Put yourself in your investor’s world for a moment. Every investment must answer a specific query: How will I get paid for the risks I take? Every time I take a larger risk, I have to get more for that risk. Because why would I take a larger risk to get the same amount of cash?
The startups I invest in need a lot more cash up front. Their possibilities of becoming the next Twitter are slim, but we made 600x more on Twitter. I can justify taking on that much risk, potentially getting a high asymmetric return on investment.
Now let’s take a bakery. Is there a world where I can make 600 times my money? Probably not. That’s why I am unable to afford to take a big risk that you’re going to go bankrupt because I’m not getting paid enough for the risk I’m taking.
So if I am unable to justify taking on a lot of risk, how can we reduce it? One way is to get to a profit sooner. Another is to make the investment a combination of equity and a loan. As an investor, meaning I get paid in two ways: as a shareholder if you grow to be the next big bakery franchise, and from the interest on the loan.
So it is not about presenting what you are promoting, per se. It’s about understanding the risk calculations of investors.
Sure. And you have to respect that. Plenty of people think they have to raise money because they need money. But an investor doesn’t care about your desire for money. An investor cares about getting paid for the risk they’re taking. their money.
When you are trying to get a return, what you are promoting can mainly be one of two things. It will be growth-oriented, which is what I’m investing in. Or it might be profit-oriented. It cannot be somewhere in between. Too many people confuse those two things.
This is why a growth-oriented bakery might invest all its money into marketing and selling cupcakes at a loss because it values its users’ needs. growth over profitsWhat would a model that puts profit first appear to be?
Profit first signifies that my first client ought to be profitable. What am I supposed to do? Really you would like to get one customer? Do I would like a bakery, can I bake these things in my home kitchen, can I rent out the school canteen outside of labor hours? When I have one profitable customer, how do I get 10? And then how do I get 100? Then I put a business structure on top of that to make that occur. A great business is accumulating profitable customers over time. And if it takes a very long time or is really dangerous, then it is not a good investment for your loved ones or your mates.