To finance a startup, small aspiring entrepreneurs can rely, even before banks, business angels and venture capitalists, on the so-called “3Fs” or “FFFs.” But what is the meaning of FFF? And what does this method of financing consist of? You can find the answers in this guide.
What is the 3F Method for financing startups
Let us first clarify what are the 3Fs around which this particular method of funding a startup revolves: they stand for “Family“, “Friends” and “Fools“.
This last item probably needs the most explanation: it refers to those people in your personal or professional circle who might become passionate about your idea and espouse your cause.
The 3F method, then, consists of a strategy of reaching out to parents, relatives, friends, colleagues or acquaintances to ask them for financial support a business idea.
Why choose the 3F method?
In Italy, asking relatives or friends for financial help to succeed in realizing one’s dream in the drawer is often considered something to be almost ashamed of. In contrast, in the United States of America, the 3F method is a well-established fundraising strategy. Not surprisingly, Reid Hoffman once said:
“The only way to be successful is to have people believe in you before you prove you deserve credit.”
You should also know that family, friends and “fools” have some characteristics in common: first of all, underlying their decision to invest is trust and not a mere rational process. Generally, then, they are not professional investors and are little aware of the risks involved in investing.
This, in some ways, can make it easier to succeed in obtaining financing but, for this to happen and for this strategy to be successful, it is essential that you pose in the right way with your interlocutor (from whom-remember-you are still asking for money). Posing in the right way means, in this case, informing him properly about the risks and terms of the deal.
Benefits and challenges of financing through 3F
To understand why to choose the 3F method (or, conversely, why not to) you must also know the advantages that this strategy offers and the challenges it forces you to face.
Benefits of relying on Family, Friends and Fools
One of the main advantages of financing a startup with the 3F method is the possibility of saving interest and fees that, instead, are expected in more classic financing strategies. Not only that: by turning to relatives and friends you can also avoid various logics and preliminary investigations that distinguish, in particular, the Italian banking system.
There are also other indirect benefits you might enjoy by turning to Family, Friends and Fools: with this method, you generally tend to maximize your investments out of a kind of debt of gratitude to those who believed in the project. For the same reason, those who opt for the 3F method also turn out to be more focused on the key decisions to be made, regarding product/service development, customers, and market.
Common obstacles and how to overcome them
All that glitters is certainly not gold: turning to friends, family, and “crazy people” to seek funding for your startup also forces you to overcome some challenges.
First of all, the risk is to assume that promises made by people close to you will then automatically translate into concrete actions: in reality, it often happens that, what at first glance may seem like an enthusiastic endorsement, later does not translate into an actual investment.
Since they are not experienced lenders and do not fully know the logic of the market and the risks of financing, these people need more explanation before giving their okay to financial aid. Beware, however, because, by the same token, too much technical information can also send them into confusion. The challenge, then, is to be able to explain in simple terms and in a practical and concrete way the soundness of your business project, avoiding unnecessary dilution and technicalities.
How to effectively apply the 3F method
In the previous lines we have suggested some ways to overcome the obstacles related to choosing the 3F method. Now, however, it is time for you to find out, more generally, how to effectively apply this strategy for raising funds for your startup.
Preparation before applying for funds
Arriving prepared for the time when you will request funds from friends, relatives, and “crazy people” is very important. You must be well aware that even if these people know you, they will not give you gifts without question. On the contrary, as already mentioned, it is often these particular funders who, not having experience in this area, need more thorough analysis. That is why it is essential that you first thoroughly analyze all aspects of your business before the fateful moment when you find yourself talking to your possible financiers.
The importance of a solid business plan
To lend the right credibility to your business idea, you should put in place a solid Business Model and a detailed, if embryonic, Business Plan, which can answer any questions of those who might entrust you with their money.
As already pointed out, it is very important to be able to strike the right balance between the need to resolve any doubts your potential investors may have and the need not to overload them with too much information, which would risk confusing them about a subject they do not necessarily master properly. A useful tip in this regard is to go into the more technical details of your startup only if they ask you to do so.
We will return to the importance of the Business Plan in a few lines. First, in fact, there is another aspect to be explored to clarify how the FFF method can be effectively applied.
Maintain realism and professionalism
The fact that you are approaching people you know well does not mean that you should lose sight of two fundamental concepts: realism and professionalism. On the contrary, precisely because of the special relationship you have with your potential investors, you should always keep in mind the sustainability of your business project and the seriousness with which you approach those who have decided to listen to your request for help.
You need to be concrete and not flaunt unattainable goals-remember that those same people you are asking for help will most likely be beside you the moment the results you promised do not come.
Strategies for presenting the project to investors 3F
The strategies you need to know to effectively present your project to 3F investors are not finished. Pay close attention to the following lines.
Clearly communicate vision and goals
Even if you are applying for funding from people you already know, you need to be able to clearly communicate vision and goals. As mentioned above, no one is going to give you their money “sight unseen.”
This is precisely why the aforementioned Business Plan is important: this document, in fact, helps you flesh out your business vision and summarize your operational and financial goals. Being clear on these two aspects will also enable you to better communicate how you plan to make your business idea work.
Techniques for establishing trust and credibility
In addition to being clear about visions and goals, you must also be clear about the chances of return on investment. It is all right to leverage your enthusiasm to engage your interlocutor and convince him or her of the merits of the project, but not at the expense of factual reality.
To establish credibility, a useful tip is to think that you are dealing with a professional investor and not your relative or friend. At the same time, however, with regard to trust, keep in mind the particular characteristics of these financiers, who are wont to place more trust in the person than in the business idea itself.
3F method, does it work?
We know what you are thinking right now: okay, now I know the meaning of FFF, but does this 3F method work or not?
In the previous lines we have emphasized how necessary it is to be fair and realistic when asking friends or relatives for funding for a startup. Likewise, now we need to be too: the 3F method works, but not always. In fact, the special relationship that binds startuppers and investors hides some pitfalls and can be a double-edged sword. But fear not: if you have carefully read what has been written so far, you will be able to wield this weapon without risk.
Common mistakes to avoid in the financing process
We cannot close this guide explaining the meaning of FFF and how the 3F method works without summarizing the most common mistakes to avoid in this particular startup financing process. There are several, but among the most important ones we have chosen three:
- Take it for granted that friends, family and “crazy people” will help you;
- Promise unattainable results;
- Underestimate the importance of the Business Plan.
Do you want to read all the articles related to the stage your startup is in?
