Why do investors always like to see that a business owner has ‘skin in the game’?

1. Alignment of Interests

First and foremost, investors want to see that the business owner has a vested interest in the success of the company because it aligns their interests. If you’ve got your own money on the line, you’re probably going to work a lot harder to make sure things go well.

It’s human nature. When the owner has skin in the game, they’re not just playing with other people’s money—they’re also risking their own, which makes them more committed to the business’s success.

There are quite a few online gurus pitching ‘no money down’ schemes, encouraging people to play with other people’s money. That is a parasitic approach and entirely the wrong way if you want someone else to look at you benevolently.

See : A Cautionary Tale about Wealth Creation Gurus

For investors, ‘skin in the game’ reduces the risk of moral hazard. That’s a fancy way of saying that without skin in the game, a business owner might take on risky ventures or be less careful with decisions because they don’t stand to lose anything personally if things go south.

But when the owner’s personal wealth is tied to the success of the company, they’re much more likely to make prudent, long-term decisions that benefit everyone involved.

2. Confidence and Trust

Seeing that a business owner is willing to invest their own money is a huge confidence booster for investors. It sends a clear message that the owner believes in the business and is confident about its prospects.

Investors are constantly evaluating risks, and if they see that someone with intimate knowledge of the company is betting on it with their own money, that’s a positive signal to them.

It’s almost like the business owner is saying, “I’m so sure this is going to work that I’m willing to put my own neck on the line.”

This trust factor can’t be underestimated. If an investor is deciding between two businesses to invest in—one where the owner has significant skin in the game and one where the owner has invested nothing—it’s not hard to guess which one they’ll lean towards.

The act of putting your money where your mouth is speaks volumes.

3. Reduced Risk for Investors

When a business owner has skin in the game, it often means that they have more than just money at stake—they have their reputation, relationships, and possibly their entire livelihood invested in the business.

This kind of commitment can reduce the risk for investors because it lowers the chances of the owner walking away when things get tough. If things start going sideways, an owner with a lot on the line is more likely to dig in and do whatever it takes to turn things around.

Moreover, having ‘skin in the game’ often means that the owner has been careful and calculated in their financial management.

If an owner has put a significant portion of their own wealth into the business, they’ve likely done a ton of due diligence, making sure the business model is solid, the market is there, and the financials make sense.

All of this reduces the risk for outside investors because it indicates that the business has been thoroughly vetted.

4. Stronger Negotiating Position

Another angle is that when an owner has skin in the game, they’re in a stronger position to negotiate with investors. They’re not coming to the table empty-handed, begging for money.

Instead, they’re saying, “I’m already invested in this, and now I’m giving you the chance to join me.” This can be a powerful negotiating tactic because it shows that the owner is serious, and it can lead to better terms and valuations.

In some cases, it might even allow the owner to retain a larger share of equity. If an owner has already contributed significant capital, they might need to raise less money from investors, which means they won’t have to give away as much of the company.

This can be crucial for maintaining control over the business in the long term.

5. Long-Term Commitment

Finally, having skin in the game signals long-term commitment. Investors are wary of “fly-by-night” entrepreneurs—those who might jump ship at the first sign of trouble or once they’ve made a quick profit. But if an owner has skin in the game, they’re signaling that they’re in it for the long haul.

This is particularly important for businesses that require years of hard work before they start seeing significant returns. Investors want to know that the person at the helm is going to stick around and see things through.

Conclusion

So, in a nutshell, investors like to see that a business owner has skin in the game because it aligns interests, builds trust, reduces risk, strengthens the owner’s negotiating position, and signals long-term commitment.

It’s all about ensuring that everyone’s rowing in the same direction and that the owner is as motivated—if not more so—than the investors to make the business a success.

Without skin in the game, an investor might worry that the owner’s incentives aren’t fully aligned with theirs, and that’s a risk most investors aren’t willing to take.

Your Choice of Approach

It’s your choice whether to back yourself with your own money, or look for a way to start a business for free, but the former will always be the champion. That’s why I have a subscription at Wealthy Affiliate, because it keeps me focused and makes me feel invested in my own future.