Rounds of attraction of investments. Family, friends and fools: what is an FFF investment?
How do you think, where to start financing your startup? We have previously touched on this topic, analyzing the investment principle "Level Up". Now let’s dive deeper into this topic.
First, let’s look at investment rounds.
What is it?
An investment round is the stage of raising funds, where its funds help a startup create a product, test the main judgments regarding the market, customer acquisition channels, build a team and expand sales.
The main rounds of attracting investments:
1 FFF (family, friends, fools – family, friends and fools). This is exactly what helps us in the first place in the “Level Up" principle. A naked idea will not interest any investor. But he will be attracted by the way you implemented the first stage yourself, namely: you convinced your loved ones to participate financially in your development or invested yourself. For them, this is an indicator of motivation and seriousness at further stages.
2 Pre-seed. The stage with the appearance of the prototype and the first customers, as well as ideas and assumptions for building a business around the product you create. In most cases, these stages are invested by private venture investors (they are also called business angels).
3 Sowing stage (seed). The first sales have appeared and it is already possible to analyze the processes for further actions towards increasing business. Seed funds join business angels.
4 Round A. The characteristic of this round is a uniform growth in sales and the addition of attracting finance in new market niches.
5 Rounds follow, starting from B, C and others, ending with an IPO – placing the company’s shares on the stock exchange. Here, a startup is already becoming a full-fledged business and is using more and more new investments to quickly increase its scale.
Let’s go back to the very beginning, namely the first point of the investment round and the fundamental point of the very principle of "Level Up".
And this is stage 3F, which means that your business idea will be supported not only by the moral, but also by the financial contribution of people close to you. FFF means Friends, Family, Fools – friends, family and … fools. But you should not be offended by the last definition, because in this case it means people with no experience in financing, who do not always understand that there are risks in investments. The argument for contributing to your project is that they know you, your character and work acumen, so they trust you and cannot refuse. With this money, you create an MVP (minimum viable product) and run a business model test.
Benefits of the FFF stage:
- Loyalty, in which only an idea will be enough for them (at least at the very beginning). There will be no need to waste time on long procedures for processing transactions, setting KPIs, detailed presentations and reports.
- The speed and ease of obtaining investments, unlike investors in other rounds.
- You can do the formation of your business model in the early stages without interference from your friends and relatives, since they have a certain credit for your actions and therefore they will allow you to control everything yourself.
Disadvantages of the FFF stage:
- If you involve the Fools resource in investing, you can get a partner with a person with no business experience and who does not understand the possible risk of investing at all.
- Relationships with loved ones can be ruined if your project fails. If people are not professional investors, they may not feel the line between expectation and reality.
- Attitudes towards the value of such money can be different. Some entrepreneurs may be reckless with expenses and take reckless risks. And others will not be able to relax like that and vice versa, they will refuse any risks, the main thing is not to lose the money given to them.
How to properly use the FFF resource to receive investments?
- You need to properly assess your investment needs. Try to determine the exact amount for the first contribution to your project. It may be that in fact you need an amount much less than you think.
- The contract is required. If there is no inscription on paper, then nothing happened. The contract will remind you, first of all, of how you received the money. It must indicate: the essence of the business project, the conditions for the cash injection, the obligations of all parties, the conditions for withdrawing from the project, the responsibility of the parties in case of non-fulfillment or violation of the clauses of the contract, and the procedure for distributing property in case of bankruptcy.
- Before signing the contract, speak again (to anyone who makes an investment) where the money given to you will go and list all possible scenarios.
- Also decide whether your investor will be involved in the process of your project. If a person himself does not have such a desire or he has experience, it is better not to involve him in participation.
Ben Lipson, the owner of the startup SportsTradex, said that by getting the initial funding through the FFF resource, he significantly attracted the attention of other investors. But the very fact of the presence of such investments did not affect investors in any way. Therefore, we repeat once again that first of all you need it.