building relationships

Investing in a Friend's Company

I've been mentoring a startup for a few months now. And over the course of our conversations, the founders and I have become friends.

They told me recently that they're raising their seed round. And they invited me to invest.

The problem is... I don't have conviction in the business just yet. There are too many questions around the use-case of their product and who their customer is.

But how do you say no to a friend? Especially when that friend knows you're an investor?

I reached out to an investor friend for some advice. And she delivered.

She said her investments fall into three buckets. If the company doesn't fall into one of those buckets, she doesn't invest.

Below are those three buckets. And also her fail-safe way of saying "no" without hurting the relationship.

Bucket #1: The Opportunity

This is the most obvious bucket. And perhaps the most ideal.

An opportunity investment could be:

  • a fast growing company
  • led by a dynamite team
  • that's solving a big problem
  • for a large market

Of course, that's an ideal scenario, but you get the idea.

The  "opportunity investments" are one that you believe could bring you a return on your investment.

For these investments, writing a $5k or $10k check at the pre-seed level could make a lot of sense.

Bucket #2: The Relationship

This bucket is a bit more complicated.

Perhaps a friend approaches you with an idea for a business.

For whatever reason, you're not sold.

But you believe in this person.You believe that they could start something huge one day, and you want the opportunity to invest in THAT company when the time comes.

Or perhaps this person has invested in you in the past.

And you know that rejecting them now would damage your relationship. And the relationship is worth more to you than a small check.

In these instances, my investor friend recommends writing a small check, like $3k.

Bucket #3: The Mission

One day you'll come across a company that you know will not bring you a return on your investment.

Whatever you give them, you know you won't see a dime of it back.

But you love what they're building. And you want to support the people who are building it.

Maybe it's a climate-tech startup out to change the world.

Maybe it's a company designed to help people on opposite sides of the political spectrum understand one another.

Maybe it's a D2C company that's passionate about making plant-based food more accessible to the masses.

These companies aren't charities, but your investment may as well be a donation.

Because it's going to a cause you support, and you most likely won't see an ROI.

In this case, you could say to the founder:

"I love what you're doing and I want to support you. I can't offer a lot right now, but here's $1k to put towards the mission."

Saying "no" to a friend

If a friend approaches you to ask for investment and the company doesn't fall within these 3 buckets, you may just want to say "no".

And that's ok! It's your money. You don't owe anyone anything.

But rejecting a friend without ruining the relationship... well, that's tricky.

Here's the line my friend suggested I use:

"I am so excited for you to start raising! Unfortunately my financial situation has changed and I'm not in a place to invest right now. Maybe I can help in another way, like review your deck and give you feedback?"

This response is brilliant for a couple of reasons.

First, no one can argue with financial circumstances. They just can't.

Secondly, it leaves the window open for you if things change. For example, if the company suddenly finds product/market fit, or figures out who their customer is, you can go back to them and say:

"Hey! My financial situation has changed for the better and I'd love to invest if you're still open."

Of course, there's always a chance the founder is no longer raising. But we're talking about investing here... there's gonna be a risk somewhere, right?

Counting buckets,
Kera from Hustle Fund