One of the most common ways startups raise initial funds is through the family, friends and business associates (FFBA) exemption—aka pre-existing relationships. The common reason being, most banks and accredited investors typically aren’t willing to invest in a business that doesn’t yet have proof of concept. And more often than not, it takes some initial investment to get a company to a stage where it’s validated by the market and has the type of traction traditional investors want to see.
Typically, family and friends are the most likely group to initially invest in your business—they know you personally. If you have rapport and established trust, they are more likely to believe your business idea is credible. They are more likely to take a chance on you given if you have history together. And they are more likely to believe in your ability to succeed and provide a positive return on their investment.
Beyond family, friends and business associates, and for those companies who already have a product or service, the other group that’s well connected to your business is your customers. People who already know and love your product and believe in its value are more likely to advocate on your company’s behalf than those who have never tried it first hand. Your customers are often your most loyal brand champions, and so more and more companies are tapping this group for early-stage investment through equity crowdfunding exemptions. Not only does this provide startups with much needed access to capital, but it gives your early adopters a chance to get in at the ground level—it allows them to share in your success in a meaningful way that hopefully leads to their future reward.
Investment from FFBA and the crowd can also serve as an excellent proof of concept and proof of credibility for accredited investors. If the people who know you and/or your product entrust their money to you, your credibility is enhanced. And vice versa, if you aren’t able to raise funds from these so to speak ‘low hanging fruit’ groups, it could raise some questions from seasoned investors.
At FrontFundr we believe the best deals include a combination of both regular and accredited investors. The value provided by both loyal advocates and seasoned professionals as investors can provide unprecedented synergy. And in most cases, it’s rare to have only one or the other since big investors aren’t likely to provide initial investment, and the crowd likely isn’t able to provide the quantity of funding needed. Ultimately, businesses should aim for a balance of both regular and seasoned investors.
For more information on getting started with an equity crowdfunding raise, visit our Entrepreneur Suite where we’ll walk you through the basics of how it works. And if you’re looking to make an investment, visit our Prospect Lounge for companies who are planning to raise funds in the near future, or Pitch Place for our current listings of companies raising funds.