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Startupland: How to Ask Your Friends for Money—And Stay Friends – The Story of Zendesk

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Such a privilege to receive a review copy of Startupland: How Three Guys Risked Everything to Turn an Idea into a Global Business. This book takes you on an incredible journey about what it takes to create a startup and succeed. In fact, this is “the real story of what it takes to risk it all and go for broke,” the story of Zendesk by Mikkel Svane.

Startupland is that rare book every entrepreneur wishes they’d read years ago. Mikkel Svane tells a story that will grab you by the hand and give you an honest look at what it takes to launch a successful business. Read Startupland to be inspired, entertained and to help you discover practical ways to turn your idea into a global business.

Below is an excerpt from the book about raising money from friends and family and how you can ask your friends for money–and stay friends!

Hat in Hand

So, without any other options, we did something I never originally wanted to do, but what so many founders find themselves doing. We went to friends and family and asked them to invest. I now realize it was a last desperate action. Truthfully, I didn’t realize how desperate it was at the time. But think about what a terrible thing this is to do! There was a greater chance we would fail than succeed. And here I was asking my friends for money that could be lost, that would likely turn into nothing, that almost assuredly (statistically at least) would be wasted. Why was I risking this? What would become of these relationships if things deteriorated? I wasn’t taking the long view. But I didn’t try to sell anyone either.

“You are going to lose this money,” I said to these potential funders. “Think about it like a lottery ticket. There’s a much better chance that you’ll get nothing out of it.” Still, we made this friends-and-family fundraising round a formal process, working with a lawyer to draft the documents and creating a presentation in which we pitched the idea. I invited potential investors in to meet with us. In these discussions I made it clear that they would have no control or influence over how we ran the business. (They had no experience with what we were doing, so giving them any power could only bite us in the ass.) They would be completely blind as to what was going on.

And yet, despite all of this, these people, family, friends—maybe fools—wanted to invest anyway. I was surprised by the level of interest but also so heartened. They wanted to invest because they believed in us. They believed in the crazy idea that we could make something out of nothing.

It’s also just as true that we were really lucky with the timing. The climate for individual investors was perfect. We were still months away from the credit crunch in 2008. Real estate in Denmark was crazy hot. People had equity in their houses, and they had disposable money. They saw this as another opportunity.

My old friend Michael Hansen, the big-hearted, bigmouthed so-called king of Denmark, invested a bit. My friend Joachim, a television producer, invested and told his boss, who also invested. In fact, his boss wanted to invest more than our round allowed. Word spread, and it was fun to see so much interest. Most people put in around $10,000 to $15,000; the biggest investment was around $30,000. We even turned away some people. Some of our family members really had no idea what we were talking about; they just wanted to help and be supportive. We couldn’t accept that kind of money. And we had what we needed.

How to Ask Your Friends for Money—And Stay Friends

The first rule of asking your friends for money is never to ask your friends for money. The second rule of asking your friends for money is never to ask your friends for money. OK, got it: You should never ask friends for money. That is, unless they have way too much money. In that case, knock yourself out.

If you really are so desperate that you need to raise money from friends and family, make it clear that they will never get it back.

  • Set expectations low. Make it like a lottery ticket.
  • Don’t use the Zendesk case as an example. We’re the exception. Make it into a Scratchcard lotto game—something that is fun, but most likely just a waste of money.
  • Don’t give any influence in return. People are unsophisticated in this area. They don’t know how to run a business, invest aggressively, or take risks. They may not realize that a big portion of the investment basically goes to your own salaries. Don’t provide insight into the business. If you succeed, the last thing you want on your cap table (or roster of major shareholders) is a bunch of unsophisticated investors with influence.
  • Prepare yourself mentally for disappointing a lot of people. Even if you have succeeded in setting expectations low, you will still disappoint people. Even though they believe they can afford to lose the money when they invest, their financial situation may be very different twelve or twenty-four months out. And you may ruin a lot of relationships.
  • Prepare yourself for that—and don’t do it if you cannot live with that.

Excerpted with permission of the publisher, Wiley, from Startupland: How Three Guys Risked Everything to Turn an Idea into a Global Business by Mikkel Svane with Carlye Adler. Copyright (c) 2015 by Zendesk, Inc. All rights reserved. This book is available at all bookstores and online booksellers.

More info at www.startupland.com.

 

 

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