As the economy slows and credit gets tighter, more entrepreneurs looking to fund start-ups are turning to individuals they know personally rather than big financial institutions.A significant 35% of small-business borrowers sought financing from friends and family, according to a recent survey by
Skimpy PlansTurning a great idea into profits isn't easy. An investment pitch should include a thorough business plan that addresses the project's financials, marketing research, a description of operation procedures and a payback plan for investors. "Pretend you're a bank, and avoid anyone who hasn't done their homework," advises Doug Ware, a volunteer with the Orlando chapter of
A Lousy Track RecordYou want to bet on a winner, not a newbie who's looking to test his or her abilities on your dime. With most traditional investments, past performance is no guarantee of future results. But with entrepreneurs, past ventures can hint at a new effort's chance for success. Of course all entrepreneurs miss the mark at some point, so a failure or two shouldn't necessarily prompt you to walk away.
Pressure PlaysUrgent appeals such as "We're closing the deal and need a check by Friday" should give you pause. Typically, the entrepreneur is rushing you for a reason: Maybe he doesn't want to give you time for due diligence because he has something to hide. Or maybe he's just impatient. Either way, pressure to invest seldom reflects a real time crunch, explains Ken Gaebler, president of Chicago-based
Unrealistic ExpectationsMake sure the fundraising plan matches the goal. If your cousin asks you for $10,000 to launch a software company, he's probably making the mistake that too many business owners make -- not realizing how much money they'll need to get going, and to reach profitability.
Not Enough ReturnNew businesses in the early stages are risky propositions. As an investor, you're entitled to a potentially big upside, so beware if the entrepreneur wants to pay your principal back with a little interest. "Let's say the idea is worth $100,000, and I put in $50,000," Gaebler says. "That puts the value of the company at $150,000, and I should get a one-third stake in the company."