Investors come in all shapes and sizes – from professionals to friends or family members. This spectrum results in an investment risk profile that is related to the investment experience, the familiarity with the investment opportunity and the independent advice provided prior to the investment decision.
The friends and family end of the spectrum also has additional ‘emotional’ complexity, that in an ideal world would not play a part in the decision, but in reality can be a significant factor.
While the professionals will have a team of experts to advise them, friends and family often rely on emotion to make the investment decision. While this is understandable, it greatly increases the risk of a bad outcome which can include the loss of friendships and family disputes. Investors of all kinds should take the opportunity to offer counsel to the investee, rather than getting swept up in the excitement of investing or overwhelmed by the enthusiasm and apparent knowledge of the investee.
Best practice is to expect a well-researched business case, including worst case analysis with detailed justifications for any assumption regarding markets and competition.
If emotion has to play a part, then the best approach is to write off the investment at the beginning and have no expectations of the outcome, any positive outcome is then a bonus.
Unfortunately, we often speak to disappointed investors and generally we find that the key mistakes were made at the very start of the project by not approaching the investment in a professional way. As the saying goes, ‘preparation prevents poor performance’, which includes appropriate due diligence on the subject matter, markets and the investee. A sceptical stance will offer more investor protection and flush out any ‘soft’ proposals (i.e. if the investee is not able to offer sufficient evidence to support a proposal).
This may appear difficult with friends and family, but a third party opinion from a business advisory can be a sensible way to avoid conflict of interest and bad investments, as well as wasted investee efforts, thus a benefit to all concerned.
