Before you invest in a friend’s business, it is very important to ask the right questions and do your due diligence. We have put together a list of ten questions you should ask the person, so you don’t regret it.
1. Have you run a business before?
If the answer is yes, then you are good to go. If not, then you are just playing a game a luck. You might as well just go play Baba Ijebu.
2. What Is the Timeline?
If your friend’s business plan is well-thought-out, he/she will have a rough idea of the business timeline, when the business will start making profits and break even. It is important you both have 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 biz.
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 he/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.
4. Who Else Is Investing?
An important person to ask. It can help you make a decision. If you are the only one investing, try to find out whether it is because no other person believes in the idea or the person probably just wants only you on the deal.
5. How Much Money Have You Put in the Business?
Before you put your money on the line, make sure the person has already put his/hers first. Nothing creates hustle like having your nest egg on the line! Before you invest in a friend’s business, you would want to make sure he/she has invested in herself first.
6. Why Are You Uniquely Able to Solve This 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?
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?
Before you invest in a friend’s business, ask them how much money you can give them to go do something else. If their answer is anything other than zero naira, don’t invest. They’re probably 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?
This sounds like a basic question, but it is very important. The person needs to have a clear plan for making money, because it is very 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. You can also make use of a Business Model Canvass to answer this question.
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, you’ll be more confident in them following through and being successful.