Entrepreneurs really do love to pay it forward and support each other—usually. And what better way to show your support then to financially help out with a friend’s new venture?
But beware—just because someone is a good friend doesn’t make them a great businessperson. Financial commitments to friends can quickly go south and ruin both relationships.
Startup founders from the Young Entrepreneur Council (YEC) share 12 questions they would ask before getting financially involved in a friend’s startup.
1. Have You Grown and Exited a Company Before?
There’s only one thing to find out: Has she grown and exited a company before? If the answer is yes, then you are good to go. If not, then you are just rolling the dice and might as well go to Las Vegas or invest without asking any questions.
2. What Is the Timeline?
If your friend’s business plan is well-thought-out, she will have a rough idea of her runway based on the funding she is able to raise. Make sure you both agree on a clear vision for the business and what to expect on the horizon. Having a hard copy of expectations—something written down at the beginning—will bring added accountability in the unpredictable early stages of a startup.
—Matt Ehrlichman, Porch
3. What Are the Real Risks?
There’s no such thing as a guaranteed financial investment in a startup, so a “smart” investment is one that you’re willing to lose. Honestly, if you can’t afford to lose, don’t invest.
That said, your friend should be completely transparent about the risks involved in her endeavor. If she is upfront about the risks, this shows a necessary thoughtfulness and thoroughness, which bodes well for you seeing some eventual return on your investment.
—David Ehrenberg, Early Growth Financial Services
4. Who Else Is Investing?
Startup investments are hard enough to predict without introducing the bias of investing in a friend. If you are considering making this investment, I would recommend you consult the wisdom of the crowds before making your decision. If you are the only person willing to back your friend, it’s likely that you’re not making a smart financial investment.
5. How Much Money Have You Put in the Business?
Only you know your friend and her capabilities. And only you can decide if you believe in the vision and your friend’s ability to execute. I believe the biggest indicator of startup success is hustle. And nothing creates hustle like having your nest egg on the line! Before investing in a friend’s company, I would want to make sure she has invested in herself first.
—Aaron Schwartz, Modify Watches
6. Why Are You Uniquely Able to Solve This Problem?
A startup is just that—an underfunded underdog hopefully tackling a meaty problem. What makes you think you’re the right person to solve this problem? Why hasn’t it been solved before? What do you bring that’s unique, not only in company approach, but also in personnel? Who are the people who would make me confident enough to invest in this horse to win this specific race?
7. Will This Impact Our Friendship?
Money comes and goes, but great relationships can be difficult to find in life. Have a serious talk with your friend and go through scenarios where everything falls apart or really painful decisions have to be made. Understand where the line should be drawn between personal and professional, and figure out your strategy to make sure your friendship comes first.
8. How Much Can I Give You to Do Something Else?
Ask them how much money it will take to make them quit and do something else. If their answer is anything other than $0, don’t invest. They’re doing it for the wrong reasons and will probably fail when faced with the extreme pressures of entrepreneurship.
9. How Do You Plan to Make Money?
It sounds simple, I realize, but I would have to know her plan for generating revenue because it is easy to get caught up in the excitement of a new venture without thinking through all the logistics and nuances—even those that are the most basic.
—Bobby Grajewski, Edison Nation Medical
10. Are You Doing This Full Time?
It’s important to know how committed one will be to the project. I have some friends that start projects, but never finish them, even if they mean well. If they’re willing to put some skin in the game, whether it’s time or money, I’ll be more confident in them following through and being successful.
—Russ Oja, Seattle Windows and Construction, LLC
11. Do You Have a Blueprint?
What assumptions have you used to figure out how much you’ll need to get to profitability?
—Sarah Schupp, UniversityParent
12. Do You Have Paying Customers?
Ideas are not worth much money without action, and in many cases, even when executed perfectly, they just don’t have market viability. It’s important to prove that customers are willing to pay for a product before investing cash into a business.
Businesses in general are not worth money to outside investors unless they are generating cash, or they are gaining a lot of traction in terms of users. So from an investment perspective, it’s very important that the business has customers either already paying or committed to paying before committing cash.
