You’ve heard the benefits of investment groups: Spreading risk, pooling capital, growing your investment brain trust, and more. Now, you’re ready to learn how to start an investment group of your own.
About a decade ago, my brothers and I decided to start our own investment group while on a fishing trip together. We ended up coming out on top, investing in several real estate opportunities and even a prize-winning racehorse, but our path was bumpy, to say the least.
Thankfully, we went through that pain, so you don’t have to! And we’ve since helped over 1000 tribes avoid the biggest pitfalls that we had to overcome.
This post will outline the six top mistakes new investment groups make. Armed with this information, you’ll be ready to start an investment group the right way.
How to Start an Investment Group: Essential Steps
Before we dive into the things you shouldn’t do, let’s first establish a few essential steps you should take to start an investment group.
The first step to building a successful investment group is to choose the right partners. It’s just as easy to overthink this part of the process as underthink it. You don’t want to choose just any friends or family members to join your Tribe, but as long as you’re teaming up with like-minded people with similar investing interests and goals, you’re on the right track.
Related Read: The Beginner's Guide to Group Investing: How to Build Wealth with Friends
Your next step is to align on the purpose and goals of your group. Are you looking to make one investment and then get out, or are you planning on pursuing multiple investments together for years to come? Your goal can grow and change as your group members grow and change, but you should begin your journey aligned and on the same page.
Step three is to file your LLC and create a business entity. Once your paperwork is in order, you’ll be ready to launch your investment group with the perfect investment opportunity!
Tribevest knows a thing or two about successful investment groups—we’ve also seen the reasons why some groups fall apart. Let’s cover the top five mistakes we’ve seen new investment groups make.
1. Neglecting to Establish Rules
When you start an investment group with friends or family, it can be tempting just to keep things casual—don’t fall into that trap.
Starting an investment group comes with a number of questions. How much is each member willing to invest? How can you purchase an asset as a group? And these questions are just the beginning of an avalanche of “what-ifs” and “then whats” that will follow.
Establishing rules and formal voting procedures upfront will help with decision-making processes and help you keep the business (your investment group) separate from your personal relationships with group members.
Decide on rules and voting procedures early in your group formation process, establishing expectations and formal processes right from the get-go: Trust me, it will save you headaches.
2. Poor Communication
Another common pitfall you’ll want to avoid when starting your investment group is the pitfall of poor communication. To operate successfully as an investing group, you and your Tribe will need to start—and stay—on the same page.
The first step to combating this issue is to get aligned early and often. Some key moments of the process in which you’ll want to take a step back and realign include:
- Before forming your entity
- Before making any investment
- Before making key decisions
- Before calling a formal group vote
Aligning at all of these checkpoints will help you avoid conflict within your group. However, you should also keep lines of communication open and transparent outside of these major decision points. And when I say “open and transparent,” I mean for all group members. That means no sidebars. Segmenting your investment group into multiple sidebars is one of the quickest ways to destroy group trust, which can spell disaster for your investment group—and your personal relationships with its members.
3. Noncompliance Issues
I’ve already stressed the importance of formalizing your investment group for the sake of your relationships. Now it’s time to examine the other side of the coin: Formalizing your investment group for the sake of legal compliance.
Your investment group is a business, and you will need to treat it as such. File an LLC to formalize your business entity. Ensure that you file your LLC appropriately and take steps to keep your paperwork up-to-date.
As the group founder, you will need to take compliance into your own hands. Take responsibility for distributing annual tax forms to all group members and maintaining your LLC paperwork.
Maintaining the paperwork for your investment group can feel overwhelming. When you invest through Tribevest, we file your LLC for you and help you maintain all communication and compliance information in our tool. In short, if you decide to invest through Tribevest, this step gets a whole lot easier.
4. Unequal Participation
If you want your investment group to run smoothly, everyone in your group will need to feel like a valued, equal participant in the group’s activities. To be clear, this doesn’t mean that everyone in the group needs to invest the same dollar amount. As long as you lay out each party’s investment percentages in the beginning of your group formation process, things should still run smoothly.
When I say everyone needs to be an equal participant, I mean with regard to two things: Decision-making and enthusiasm. Is every group member an equal participant in voting processes, or are sidebar conversations taking place that cut some group members out of the decision-making process?
Related Read: Buying a House with a Friend: 3 Costly Mistakes to Avoid
Are all group members equally enthusiastic about the investment you’re pursuing as a group? Some compromise may be necessary, but if a member of your group is not invested emotionally in the group’s success, it may drag down the enthusiasm of the entire group. Ensure that you have exit clauses built into your group rules. These clauses will allow any unengaged group members to remove themselves from the opportunity without causing harm to the group’s success—or your relationships.
5. Giving In To Frustration
Starting an investment group comes with a lot of frustrating elements. Avoiding the pitfalls I’ve listed above can help you overcome most of these, but there is one frustration that you’ll likely encounter no matter how prepared you are: The frustration of finding the right deal.
When I started my investment group with my brothers, we had trouble finding the right opportunity for our group. We were irritated that deals weren’t always obvious, or served up on a silver platter for us to snap up and invest in. If we’d given up then, we never would have learned that the most rewarding part of the group investing process lies past that frustration!
Related Read: 6 High-Return Investing Ideas to Diversify your Portfolio
After a few false starts, we began to learn and grow together, gaining experience in how to find and analyze deals to choose the right investment opportunities for our group.
Don’t give up if you’re getting frustrated trying to find the right deal early on in your investment journey. Your group will level up together and uncover the best ways to find the best deals.
6. Skipping the Mission Statement
The last pitfall you’ll want to avoid when starting an investment group is skipping the mission statement. Making a mission statement might feel stuffy or overly formal, After all, you know your group members have come together to build wealth—maybe you’re even banding together with a specific investment in mind. A mission statement can seem silly in these cases, but it is essential.
Your mission statement helps shape your group’s decision-making processes and communicates the overarching goals of your group to all group members. It’s another way to ensure everyone is aligned, and it provides a touchstone for you to realign with one another down the road.
Essentially, it boils down to this: You know your mission, but do you really know the mission of the rest of your group members? Unless you get that information down in writing for everyone to see, the answer is no.
Here are a few examples of real Tribevest Tribe mission statements to get you started!
“Together, Double Play Investments will diversify our asset allocation into alternative assets such as multi-family real estate. The group will build wealth and collaborate together to identify top tier investment strategies.” -Double Play Investments mission statement
“To empower investors to fund their real estate investment deals and learn along the way.” -REI Freedom Fund mission statement
How to Start an Investment Group: Align Early and Often
Starting an investment group can feel like a daunting task, but transparency and communication are key. Ensure that all group members feel comfortable with the direction of the group and included in decision-making processes.
It’s also important to remember that your investment group is a business. That means you need to treat it as such. Handshake agreements, casual decision-making procedures, and messy text chains have no place here. You’ll need the proper paperwork and processes in place for your investment group to succeed.
Want to know a secret for how to start an investment group without breaking a sweat? Check out Tribevest’s group investing platform. You can use our platform to create your mission statement, operating agreement, and more. You’ll also be able to pool capital in a business bank account, manage group communications, and vote on key decisions all in the same convenient dashboard. What’s more: We’ll file your LLC for you!
What are you waiting for? Register your Tribe today to get started!