My Friend Asked Me for a $15,000 Loan for His Business — Here’s Why I Said No
Maybe try to get started before asking for cash?
“I mean you’re making good money, you’re looking for business opportunities, we know each other well, so why not?”
I was sitting at a café table with my friend on a beautiful Sunday afternoon, and I was a bit taken aback. It wasn’t every Sunday that someone was asking me for $15,000.
“Yes that’s all true, but why would I invest in your business idea? Even if I’m the only person you know who makes good money, it’s not just about that. It’s about the value you’re going to bring me for my money. You’re not pitching much.”
Here was my friend Peter, trying to pitch me a business idea out of the blue, with no track record, nothing formally started, not even a slides deck or something to show for it.
When you’re just starting out as an entrepreneur, the money you get from your family and friends is called “love money”. It comes before “seed money”, which is money you’ll try to raise from your first investors once you have at least somewhat of a project to show and pitch them.
Although I love Peter very much (we’ve been friends for nearly 15 years), he sometimes tends to get a little bit ahead of himself, and this was exactly one of those times. I ended up refusing his investment opportunity (we’re still friends) and in this article, I want to go over a few reasons why.
What’s the pitch?
It’s normal not to have a product, a clear-cut strategy, and a go-to-market when you’re looking for your first investment dollars in “love money”. But it’s still important to show people what you intend to do with their money, and what the main business idea is. In the case of Peter, he said:
“It’s going to be a new way of browsing the news, in an app, something that hasn’t been done before.”
This sounded exactly like an idea any wannabe Silicon Valley tech entrepreneur could come up with in less than 3 minutes. In other words, it didn’t sound good. I asked what was special about the app, why this hadn’t been done before, what was going to differentiate it from other solutions… But he couldn’t come up with a specific reason, which made me feel like he just wanted to create a news app that was going to be maybe nice and elegant, but not revolutionary in any way. He mentioned doing something “better than Flipboard”, without getting more concrete than that.
It’s good to know some of your competition (Flipboard is a popular news-reading app), but if you’re not going to explain why you’re better than them, there’s no point in doing market research. This was one of the first problems I identified in Peter’s “pitch”.
I’m no investor
I’m pretty good at making great investments in myself. I buy things and/or practice activities that generate a great return, make me feel better, and sometimes even make me some extra cash. But when it comes to investing in companies, I have no track record.
Although I have very briefly experimented with a few trading strategies in the past, I now only invest in the S&P 500 with the DCA (Dollar Cost Averaging) approach, and that’s about it. I’m not looking to make millions, these days I’m only trying to beat inflation, which is hard enough. The way I make most of my money is by putting in a lot of work.
Finally, I don’t have tons of cash at hand, so it’s not like I’m going to be your next business angel or Venture Capital guy. I can help out with a few thousand dollars, but if you’re looking to create an app that’s going to need employees and office space, I’m not your guy.
Plus, giving money is only one part of the equation, and investors are also here to advise, and mentor their apprentice. Years ago I myself wanted to create my own startup, become CEO, and then either sell or get listed on the stock market to make a ton of money. The classic “Silicon Valley experience” as you may call it. One of my friends and I even registered a few trademarks and patents for an app back in the day, so I’ve been down the road Peter is trying to navigate. But it’s not as simple as pitching.
In my case, I realized with experience that I fare a lot better by myself, growing my business from the ground up, with me as the sole employee. I don’t have the mentality anymore to grow a startup, and I may even have developed a slight allergy to agressive capitalism.
Looking at this through Peter’s eyes, it’s important to understand who you’re talking to when asking to raise capital. I can give ideas and input, but no cash, and he failed to recognize that.
Maybe you don’t need $15,000 to get started
When I asked my friend why he needed $15,000 to get started, he said it was to make a prototype of the app, which sounded crazy to me.
Back in 2010, when my friend and I were trying to get our app going, we needed to hire 1 or 2 developers to code a prototype and have something to show investors. Developers are expensive, and unless you found someone willing to take equity in your company rather than cash (which made the fortunes of many young developers back in the day), you needed a healthy amount of cash to pay those guys.
But that was a decade ago, and there are now so many more options to make a viable prototype at a much lower cost.
- You could take a bunch of courses online, or watch Youtube videos, to teach yourself the basic of app prototyping.
- You can teach yourself the basics of Photoshop and make your app a sequence of screens to swipe through, just to get a feel of it.
- You can use Invision or Figma to create clickable areas on your static images and make the mockup screens feel more dynamic, and have a user journey.
- You could even use a drag-and-drop visual builder like Elementor (made to build websites) to simulate a web app on your mobile at first, rather than a full-fledged app.
- And finally, you can now use the help of AI to learn even faster and fix your code mistakes for instance.
Does this even need to be a company?
Given the position I’m currently in (owner of a one-person company), the thing I challenged Peter the most about was whether or not his idea even needed to be a company in the first place.
“There are so many apps that were created out of a one-bedroom appartment, require minimum maintenance, and still make a ton of money. Why do you need $15,000 to create a whole shabang around it while you could just start on your own, or with a friend that wants to help, and see how far you can get without the money? It can also be a game in that sense.”
I recently wrote about asking my banker for a $10,000 loan myself, back when I was looking to scale my blogging business. He made me realize this would have been a mistake, and I’ve been doing great without the extra cash.
I started my blog with zero money upfront, and although writing articles and posting them online is easier than creating an app, you need the same 2 things to get started in both cases:
- A laptop. To get the work done
- Gritt. A term coined by psychologist Angela Duckworth to define the passion and perseverance for long term and meaningful goals
I’ve tried so many different projects in my life, and they all failed, but money was never the problem. I never needed money, I never ran out of funds or got in debt because of my failed ideas. All I needed was to keep trying for more than a few months, persevere, and develop a strategy around where I wanted to go.
Again, the year is 2023, the entrepreneurship playing field has never been more even. You don’t need money, you need to get started and build up a foundation. Worry about putting in the work first, you’ll find the money later. Plus, if you’ve started on the work, you’ll actually have something to show your potential investors when the time comes for funding.
Let’s just stay friends
At the end of the day, I refused Peter’s offer, and we both knew that was for the best. Beyond the different perceptions we have of entrepreneurship and what it means to create a company, we also have very different personalities that would clash too much, especially in a startup scenario.
Of course, creating a good balance and being different is extremely important for a “founder pair”. Usually, you’ll want one person to sell the vision, drive the investing rounds, and get the company’s name out there. The other person will be better at executing, translating the vision into a clear actionable plan, and finding the right people to move forward. In the case of Peter and me, this wouldn’t have worked.
I declined his offer but still gave him insights and my take on his idea, and we’ve decided we’re still friends. We’ll have another coffee together next weekend, and maybe we’ll talk about something else I can write about.
Thanks a lot for reading, enjoy the journey you’re on.
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