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Don’t Shy Away from Being Empowered with Your Investments!

I’m not sure I can do this – I’m not an investor.

Actually, if you’re like a majority of the US population, you are an investor!  You may not think of yourself as an investor, but if you have retirement accounts, bank accounts, mutual funds, etc., you are an investor!  And you have options about where you can put your investment dollars.

I thought it was illegal for small businesses to ask for investment from regular people.

It is true that the laws governing investment in the United States (called securities laws) are complicated and can limit who can invest in certain investment offerings.  However, there are many legal pathways that allow regular folks to invest directly in small business.  If a small business offers you an investment opportunity, you should ask them whether they have received counsel from a competent securities lawyer.  If something is not done correctly from a legal perspective, the risk is on the business, not the investor.

What should I know before making an investment?

Wherever you invest, whether in a mutual fund that holds publicly traded stocks or in a small business, you need to be aware that there is no such thing as a risk-free investment.  You should not invest more than you can afford to lose.

Beyond that, it is up to you to decide what information you want to ask for to help you decide whether to invest.

Here are some things to keep in mind when evaluating whether to make an investment in a small business:

  1. Look at your whole portfolio and remember that diversification mitigates risk. If almost all of your investments are in the stock market, investing in a small business whose success is not tied directly to the ups and downs of the public markets can be a good way to diversify your portfolio.  Think about it – almost all of most Americans’ investments are in giant multinational public companies.  But 99% of US businesses are small private companies that account for half of all employment and half of all production.  Why put all of your investment dollars in only half of the economy?
  2. The stock market has been likened to a casino – it has become increasingly opaque, trading is often conducted by sophisticated algorithms, and financial instruments have become so far removed from the real economy that it is hard to trust that it will continue to be a safe place to put your nest egg.
  3. Warren Buffett’s advice? “Never invest in a business you cannot understand.”  Most investors not only don’t understand the businesses they’re investing in, they don’t even know what businesses they’re invested in!  They just let fund managers make all the decisions and hope for the best.  Why not invest in some of the businesses that you know and understand?
  4. Most of our investments are made through intermediaries (often more than one) like stock brokers, fund managers, and investment advisers. When you invest directly in a business, you eliminate the fees and percentages taken by these intermediaries and there is more transparency about what you are actually investing in.
  5. A business is all about the people who run it. When you invest in a small business, you’re investing in the founder based on your opinion of their commitment, integrity, and abilities.  A small business owner is generally going to be much more committed to their business’ success than a CEO of a multinational public company.  CEOs move around from company to company and get their golden parachutes when they leave.  Entrepreneurs usually start their businesses to express their most dearly held dreams and passions.  Their business is their baby so they will stick with it through thick and thin.
  6. When you invest in a business based on your relationship with the owner, that owner is going to feel personally responsible for your investment dollars. The last thing they want is for someone they know to lose money by investing in their business.  They will do almost anything to avoid having to tell their investors that they have lost their money or are unable to pay them as much as promised.  When you invest in a faceless multinational corporation, there is no similar feeling of personal responsibility to the investors.

Besides the financial returns, what are the other benefits of investing in your business?

When you invest in a small business, you often get benefits that go beyond purely financial returns.

These vary depending on the particular investment and business but they often include

  • Having the pride of knowing that you helped a business that’s important to your community
  • Being able to tell your friends and colleagues that you invested in a business they may know and love
  • Being part of a community of investors with similar values
  • Having the opportunity to learn from the business owner about the details of the business
  • Providing support to the business owner when she needs it – advice, contacts, business referrals, etc.
  • Having some ability to affect the success of the business as a customer and a source of referrals
  • Being invited to special events
  • Being recognized publicly as a supporter of the business
  • Discounts and perks
  • Knowing that your investment dollars are supporting something that is having a positive impact in the world

Remember, all investments have an impact – what impact do you want your investments to have?  When you invest in a mutual fund of public company stocks, does that create any positive impacts in your community or on things that are important to you?

Investing in small businesses allows you to invest in the real economy in a business that employs people and provides useful goods and services.  When you invest in public company stocks, your money doesn’t even go to that company – it just goes to the previous owner of the stock!

Why not use some of your investment dollars to invest in things that are important to you?  Community gathering places, alternative energy, businesses that create good local jobs, etc.  Imagine if everyone moved just a small percentage of their investment dollars to small businesses creating a positive impact in the world – we could create a better world by simply being more mindful about where we put our money.