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Dear Pete:
A dear family friend of mine makes the best cookies you’ve ever tasted. Every time I have one, I think about how good they are and how much money she could make if she went into the business of selling these cookies. I recently shared this idea with her, and it excited her greatly. She’s never run a business before, but I find her incredibly hard-working and kind. The more I think about it, the more I want to invest in her success. I think I could probably invest about $75,000, but I can’t afford to lose the money. What’s the best way to make this investment pay off?
John, Indianapolis
Sometimes I feel challenged by how passionate I am about my answers to my readers’ questions. People ask me for my opinion, I deeply consider their question, then I share my perspective in an empathetic and approachable manner. I enjoy this dynamic. I know how hard it must be to vulnerably share the details of a matter and then wait for some pithy stranger to weigh in and make judgment. Therefore, I tend to take a deep breath before my reply, especially when I feel like the answer is beyond obvious.
That first paragraph was my deep breath.
John, put away your checkbook.
I enjoy a delicious baked good as much as the next guy, but your palate shouldn’t be the main trigger in the deployment of capital you can’t afford to lose. Running a business for the first time, a food startup nonetheless, is incredibly difficult and undeniably risky. This alone should deter you from investing in your friend’s cookie business, but I’m willing to give you a few more compelling reasons.
In Michael Gerber’s iconic business book, “The E-Myth Revisited,” you learn about the three essential duties of any entrepreneur (the E in E-Myth stands for entrepreneur). Ideally, an entrepreneur is good at at least two of these duties, and successful entrepreneurs find a way to account for all three duties.
A business owner must be a capable technician—or at least account for the technical side of the business. In your friend’s case, she must be a capable baker. I’m not going to argue that she isn’t a capable baker, but there’s a bigger gap between an excellent, amateur home cook and a seasoned (food joke!) food services professional than you might think.
The second duty of an entrepreneur is to be a good manager of the business. This is harder than you might imagine. In fact, I’ve owned my business for nearly a quarter century, and being a good manager of the business is still the hardest part. The accounting duties alone will chip away (cookie joke!) at your friend’s joy.
And the final duty of an entrepreneur is to be an entrepreneur. In other words, the business owner must be forward-looking and account for a plan to take the business from where it is to where it needs to be. Kindly, a person who never thought of being in business in the first place isn’t the dictionary definition of entrepreneur.
At best, your friend satisfies one of the three elements necessary for success. This doesn’t mean she shouldn’t go into business, but it does mean you shouldn’t invest. I went into business with a strong entrepreneurial spirit and learned the other two elements along the way. But I was personally taking on all the risk.
In today’s day and age, a bank would never loan your friend money to start this business based on the business case you’ve shared with me. Banks are in the business of evaluating business ideas, then predicting what sort of returns that business can generate on borrowed money. Based on sky-high interest rates (relatively speaking) and a decreased appetite (another food joke!) for risk, your friend would be declined on the spot.
If your friend is interested in pursuing the idea of starting a cookie business, by all means support her. But don’t support her to the tune of $75,000 at this time. Encourage her to develop a market for her cookies at a farmer’s market or something similar. The food production regulations alone will help her determine whether this is a path she wants to pursue. In the meantime, stay in her good graces and be glad you didn’t have to part with your dough (final cookie joke!).•
__________
Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.
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