Should You Be Friends With Your Investors?

It’s an adage for some: never mix business with friendship. But savvy entrepreneurs have discovered that there’s no one better to get into business with than friends. The same internal barometer you use to assess the quality of your friendships turns out to be great for sizing up investors, too.

In a tight capital market like the one we’re in today, the pressure is even more intense on entrepreneurs to find the money to fund their projects. One solution for entrepreneurs with the right connections, of course, is to look toward institutional investors in the venture and PE worlds that can write massive checks and be with you through multiple funding rounds.

But as there’s no free lunch, institutional money comes with strings…or maybe more accurately, thick ropes! Often, those in real estate clamor to work with institutional investors without understanding the full scope of what they’re signing up for: a high degree of scrutiny, diminished independence, and generally, capped returns and less control.

That route is fine for some. But not for everyone.

Consider how you approach investor relationships. With nearly 20 years in business, I’ve found that I’m unlikely to transact with someone who I couldn’t see myself being friends with. It’s tough being friends with an institution. But when you must partner with an institution, look for those with exceptional personnel.

Who your investors are will shape the culture and future of your company. So being as discerning about your investors as you are about your friendships is key to creating the kind of company you want.

Start by understanding your own values and preferences first. Is autonomy important, or are you comfortable doing everything—making important and timely decisions especially—with others? Are you about winning at all costs or would you trade some upside in return for people’s goodwill? Do you want to fill a small niche or do you want to spend hours and hours with your investors?

Generally speaking, institutions want less risk, faster payoffs, more control and want you to fulfill a specific role in their portfolio. They’re looking for sponsors who can put a deal together, with oftentimes excessive reporting requirements, and who will heed their advice when a deal is perceived to be falling off track.

Alternatively, getting friends on board as individual investors takes more time and more work. Instead of going after one big target, you’ve got to get to “yes” dozens of times, for substantial amounts of people’s personal cash, which you’re then going to put at meaningful risk.

That’s an arduous and ego-forward process that requires both great stamina and a great personal network.

By filtering potential investors the way you would potential friends, the task becomes a bit easier. You’re targeting just people you think would see (or be persuaded to see) the landscape the same way you do.

Keep in mind that turning to people you know also carries risk, especially when you’re first starting out. Getting friends and friends of friends to take a significant financial gamble on your business is a big ask, and you can’t be offended or put off by a no.

Get over this fear—both for yourself and investors—by establishing a high degree of transparency, treating investors with the same zero B.S. manner that you would treat friends. Whether the news was great or whether it was awful, investors should expect to get a straightforward and timely report, as well as an effective plan for next steps.

Having worked in this space long enough, it’s not the way that everyone operates. Shady players are willing to obfuscate their failures and dance around problem areas at the expense of their investors. That’s obviously not the way to make friends, and it’s not the way to treat investors either.

Investors see honesty and appreciate it. It builds trust and strengthens your network as well. Your investor friends bring their investor friends into fold. Then another, and another. The once-arduous process becomes simpler and faster, with a group of investors who share the same values of transparency and risk-taking willing to take the same leaps together.

Critically, especially for young entrepreneurs, this ‘investors as friends’ mindset opens up a key world of new mentors who can offer advice and feedback — invaluable assets for any business leader. I have a number of mentors who have helped to coach me on both successes and more importantly failures in their professional careers.

Investors—including even institutional ones—are more willing to ride the bumps with you once you’ve established this pattern of trust. Enroll investors share in a long-term vision, seeing the entrepreneur as more than a sponsor, but as a candid and aligned leader.

Building a network of investors is not the quickest path to success, but it is the most effective, creating a sustainable and successful business for you—and your friends.