How to Introduce Start-up Investment Opportunities to Friends, Family, and Great Contacts

As nonprofessional investors we all dread the fallout if a start-up recommendation or introduction we made goes belly-up or worst turns out to be fraud. I define a professional investor as someone who does this 24/7 and has the time and space to do all the diligence and then stand by it.

For the rest of us — who can be investing between a few thousand dollars (lakhs of rupees) to even a million or so (crores of rupees) — we often don’t have the time to go into that much detail. We invest using our best heuristic systems, and by the strength of recommendations from our networks.

I categorize investments into four buckets, and make it clear when introducing which bucket the investment is in. The goal is to be transparent and up-front when making the introductions.

1. I stand by this: These are start-ups that get my gold-chip backing. This means that should they screw up majorly I will take full responsibility for that introduction, and will profusely apologize, mourn, and try to somehow make it up. These also represent start-ups in which we have substantially invested ourselves, and usually involve being 100 percent on the same page with operators on the ground. As you might imagine, these are few and far between.
2. I’m in. Here’s why. Invest at your own risk: These are start-ups in which we have invested for a variety of reasons, usually involving strategic-based reasons or simply that we love the founding team. But what we get out of this investment type might be very different from what other people might receive. For these I share the thesis we are following and on what we intend to get out of the investment — yet clearly stating there are risks involved and anybody putting their money in does so at their own risk.
3. Interesting, invest at your own risk: These are start-ups in which we can’t invest for a variety of reasons, but still find the both the space interesting and also the business model interesting. Usually the person I am introducing such a start-up to has more of a synergistic knowledge of the sector and field, and is not just a pure play financial investor. Again, I’m making the introduction thinking the friend would be interested in the start-up; I have not done the due diligence for putting my money in, and would recommend the friend conduct a thorough due diligence before investing.
4. Friend obligation, invest at your own risk: This is when I know one or more of the founders personally, and it is due to the strength of that personal relationship that I am making the introduction or any investments. This is due more to respect and personal obligation than any sign-off on the rest of the team, the actual idea, or the business model of the start-up.

Other dimensions:

1. Don’t ever become the “hype man” of a start-up unless you are a founder or are willing to stake your reputation. Sometimes we get so excited about a sector and a founding team that our friends end up investing more based on our enthusiasm than on what actually matters on the ground.
2. Be frank on the level of due diligence you have actually done. It’s okay to rely on someone else’s due diligence for your decision making, but you need to be up-front about that when you make the introduction to your friends.
3. Never break the bank. Never offer an investment opportunity to someone who is using his or her primary savings or nest egg for that investment. It is one thing for your friends to lose excess cash — and quite another to dramatically change their life.
4. State your vested interests up-front — whether it’s a relative, you are receiving advisory stock, or the company is your customer. Being up-front preserves the trust and, in fact, a vested interest can even mean you have better access to information.
5. If you made the introduction and recommendation, it is your duty to confidentially inform your friends if you plan to pull out of the investment or have new relevant information.
6. If your friend’s name will add value to the investment and that is the reason you are making the introduction, you will need to make that clear as well — “Hey, this start-up could really use your name on the investor nameplates and as a mentor.”

Nothing destroys relationships more than a feeling of being betrayed or swindled. Remember, the vast majority of start-ups will fail, and being up-front about everything when making an introduction will preserve those long-term relationships. In the long term, both the start-ups and your friends will be grateful for your prudence.