Question: I’ve done angel investing for the past 8 years. I most often invest with people I don’t know or am referred to. I have invested a few times with friends and it has always been hard to be tough on them as a shareholder, so I’ve stopped which is too bad since I have some smart friends. Any advice for investing in a friend’s company?
This reminds me of the cliche “some of my best friends are angel investors.” While I understand that it can be difficult to be an angel investor in a friend’s company, it surprises me that you’d actively seek out “non-friends” to make angel investments in.
I’ve made over 50 angel investments since I started investing in high tech companies in 1994. Some of them have been in companies run by friends; many of them have been in companies run by people I didn’t know at the time I invested. When I look historically at my economic outcomes, some of my biggest successes were in companies where I didn’t know the people involved prior to becoming an investor while others were with close friends. My failures correlate similarly.
Over time, one thing has remained constant: almost all of the people that I’ve invested in – including those that failed – have become friends. And – in many cases, I’ve backed them again (and again.)
If you asked an entrepreneur I’ve invested in about my behavior – in both success and failure – I think he’d tell you that I was supportive, helped whenever and wherever I could, but was always direct with my feedback, even if it meant tough love. I try to just spoke my mind, be as clear as I can be, and do my best.
Ultimately, I think it’s a mistake to shy away from investing in friends (especially if you have smart ones.) The key is to be confident in your ability to communicate clearly and – when delivering tough, difficult, or critical feedback – to do it in a constructive and thoughtful way. And – some of my best investments have been in people I’ve become close friends with through my earlier investments with them, regardless of the outcome.
