What's your problem?

Q: I've been asked by the son of a close friend to invest in his start-up business. He seems serious about it, having done some market research and put together a pretty solid business plan. But it's an online business in an area about which I have no knowledge. He's after a fair whack of money, and I'm tempted to give it to him, but I'm slightly nervous that if he doesn't pull the venture off, or if I have to give him stern advice, it could make things awkward for my relationship with my friend. What would you recommend?

by Jeremy Bullmore
Last Updated: 31 Aug 2010

A: The only reason you're even contemplating this investment is because it's the brainchild of a close friend's son. And that's a rotten reason. If that weren't the case, I'm sure you wouldn't go near it. Unless you're going to look on it as an unconditional gift to a sort of godson, you should approach it as dispassionately as you would any other investment opportunity. It might be a golden one and it might be dross. The point is, you've absolutely no idea.

Warren Buffett, the man widely held to be the world's most successful long-term investor, has a few fundamental rules to which he remains resolutely true. And one of them says: 'Never invest in a company whose business you don't understand.' If that's good enough for Warren Buffett, it should be good enough for you.

I'd be interested to know if it's only the son who's approached you or whether his father has added his own encouragement. I do hope not; he must surely realise just what an impossible position it puts you in. You're rightly nervous that if things went wrong, it could affect a relationship you value. Saying thanks but no thanks could be pretty awkward as well.

So if you already have financial advisers, use them. Invite them to give that business plan the closest possible scrutiny. Tell them the amount of money (the 'fair whack') that could be involved - and ask them, all sentiment aside, to assess the risk. The chances are that they'll advise you strongly to keep well out of it. It's inconceivable that they'd unreservedly recommend it. So when you make your decision known to your friend and his son, make it clear that it is on the basis of dispassionate professional advice.

And if you haven't got financial advisers, I'd be tempted to imply that you have. I know it's morally wrong and all that, but if it helps the three of you preserve important relationships, it's probably justified.

Please don't feel bad about your decision. If the son's business plan is solid and his market research has been properly conducted, he should be able to raise what he needs through the usual, totally businesslike channels.

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