The Case for Minimum Investment from Your Private Investors

Here's a situation for you:

 

You're raising money to buy an investment property. Taking acquisition cost, rehab & incidental expenses into account you figure you need to get about $250,000 in private funding. So, you start talking to some private investors and you drum up $200,000. Awesome. $50,000 to go. Excitedly, you meet with another prospective investor. They are interested in placing funds. You have told them how much they can place for this deal (50k). The private investor thinks a then tells you they would like to start out investing $25,000 and see how it goes from there. But, $25,000 is below the 'minimum' investment threshold that you A) have set for your business and B) need for the deal to be funded.

What to do?

First, let's go back to why having minimum investments is important. There are actually 2 reasons:

1. Psychology - this is the most important reason. An investment minimum is the ultimate 'take away sell.' It shows your investor that you don't need their money. Remember need = no private money.

2. Logistics - smaller investment amounts are harder to manage. It takes just as much paperwork to handle a $25,000 investment as a $250,000 investment. Also, you have to put multiple investors together to make projects work, which can create problems if one or more investors wants to "cash out" early.

Now, going back to our situation - what would you do? Would you take the $25k and then find another $25k and close the deal? Or, would you firmly tell your investor that your company has a $50,000 investment minimum?--As a side note, you should have already qualified the investor as having the funds available to invest $50,000 (more, hopefully).

 

As hard as it may be, you should not break your own rules. Set an investment minimum and stick to it. Your investors will respect that. There are many ways you could counter the "I'll just invest $25k now" offer. Too much to go into here (later, I will touch more on handling objections and offers like this). You should not jeopardize your integrity and what you have told other investors who were required to invest the full $50,000 or more.

Hedge funds and other institutional investors often have minimum investment amounts. And for good reason. You don't want anybody investing with you that can't afford to comfortably place the minimum funds. If the investor balks or says they can't come with the entire minimum amount you require, simply tell them how you can help make more funds available for them, such as  offering to help facilitate a self-directed IRA investment.

You should always be in "problem solving mode" - but don't compromise your guidelines. The big investors that will place larger sums with you and will help propel your business skyward will respect and admire that you run your business professionally.

Never neglect the power of the 'take away' sell - "hey, Mr./Ms. Investor, investing in my company is not for everybody - it's only for people who want to avoid stock market insanity and get great, no hassle returns. Additionally, I don't accept less than $X in terms of minimum investment."

Even hinting that people can't have something or don't qualify will make them want it that much more.