2 Harsh Experiences Convinced Me Never to Invest in Friends' Companies
How do you avoid the drama-filled minefield that can result when a friend pressures you for financial support? Try these 4 responses.
I’ve lost not one but two friendships this year because my response to an investment opportunity didn’t meet those friends' expectations. The lesson I learned? Friends and funding definitely don’t mix. Here's what happened:
Experience No. 1 occurred at 2 a.m., Sydney, Australia, time. I had just met my girlfriend’s mom, so it had been a full day. And, given the late hour, I just wanted to go to bed. That was when I received a text message fr om a close friend who had been pushing hard for me to invest in his business.
I had already told him in multiple conversations that thought he had a good “lifestyle business”; I had said I would support him but not invest. I would make useful introductions for him, I'd promised, to friends and family members I knew would invest.
Then came his text. “Sorry, just so you and I are absolutely clear," he wrote, "we are not desperate for funding. We have $500K committed. We’re good.” Shocked at his audacity, I responded with just one phrase: “Good you don’t need my help.”
We haven’t spoken since.
Experience No. 2 echoed No. 1 and happened earlier this year with someone I'd considered to be my best friend: an entrepreneur in Southeast Asia whose empowering presence, strategic presence and extraordinary determination had carried her through multiple business pivots. Through a series of calls and texts, she demanded that I invest in her bridge round or have my existing holdings and investment be “boxed out” of the new entity she'd create after she restructured her business.
Flabbergasted, I didn’t respond and decided to wait before re-engaging. Needless to say, there has been no re-engagement.
Proceed with caution.
As an entrepreneur, I am naturally attracted to people propelled to create and build something bigger. Because I have a similar drive and motivation, these relationships evolve into friendships.
Instinctively, I have invested both capital and time in friends’ businesses. Yet, every now and then, one of them presents a truly challenging business idea. When my response doesn't meet that person's expectations or I offer constructive criticism, the friendship often takes a turn for the worst.
Others say they’ve experienced the same thing. In The Startup Founder’s Guide to Fundraising, Justin DiPietro, co-founder and COO at SaleMove, expressed similar concerns about these kinds of investments, saying, “I would rather not take friends' and family [members'] money. It would add a massive amount of personal awkwardness and stress.”
Over the last few months, I have spoken with many entrepreneurs to determine the best methodologies for saying “no” to an investment in a friend’s company without jeopardizing the treasured relationship. While the methodologies shared here are imperfect in many ways, I do believe they are better than just saying “no.” Here’s how to avoid this drama-filled minefield.
Highlight how other investments have “maxed” you out.
One of the most common ways many entrepreneurs decline to invest in their friends’ challenging companies is to highlight how other startup and public market investments have “maxed-out" their available capital for the year. Typically, no one will ask you how much money you have allotted for investments. You might only have a few thousand for investment or you might have six figures. Either way, all they need to know is that there’s nothing left.
This approach works because no one wants to question whether you are sure you don’t have any money remaining. Instead, this explanation shuts the conversation down without offending the friend asking.
Essentially, this strategy also buys you time so your founder-friend can’t ask again for the next month or so. Over the next year, there’s a good chance that he or she will find the funding elsewhere without the issue adversely impacting your friendship.
Offer to recommend the friend's startup to someone else.
Another common method is to politely decline but then recommend other investors or stakeholders who might be interested and willing to invest in the friend's company.
Share advice from the U.S. Small Business Administration with your friend. The government agency recommends that a company founder focus on potential investors that prove they have financial sense and a realistic view of your business plan.
In your network, you may know of some ideal investors for your friends who are more closely matched, with no personal ties. By your doing so, your friend will see that you have gone that extra mile to make a connection and find a funding source. Since so much about business is “whom you know,” the friend most likely will appreciate your effort to reach into your own network to help.
However, even with this approach, you'll have to tread carefully. This process is similar to what happens when you try romantic matchmaking. Although all you have done is introduce one person to the other, if things don't work out, there's always the risk that either or both people may blame you.
Give advice, not capital.
Rather than offering capital, provide other assets. These assets could come in the form of your time, connections and expertise, to assist your friend's business as an advisor. Often, when starting a company, a founder prefers advice and guidance over capital.
Think about what experiences or skills you have, or that those in your network offer, that you can share with your friend. Suggest potential solutions to barriers your friend is facing or make yourself available as someone to bounce ideas off of. If you know a talented developer or marketer, this particular recommendation could be valuable.
However, as already noted, even constructive criticism can impact a friendship. If the friend isn't willing to accept this type of guidance, perhaps yours isn't a solid friendship based on open, honest communication.
Keep it all "business."
I’m upset that my two friendships were ruined by the mixing of our business and personal relationships. In learning lessons for the future, I would avoid any investment in a friend’s business or any startup connected to a friend. However, I would gladly connect my friends to anyone who might help develop their businesses, financially or otherwise.
In sum, there are many other investment opportunities out there wh ere the focus is strictly on the transaction and return. But no deal is worth risking your friendships. Once the damage is done, it’s difficult to go back to what you had before.