I just got back from the Boulder Open Coffee Club. I met a ton of people there, it’s a great bi-weekly event that you should check out.
I was talking to someone there today about active vs. passive angel investing and what that really meant. Strangely, I had this exact same conversation yesterday at lunch with the guys from Eon Business. I think the vernacular of “active” vs “passive” falls a little bit short in this context – here’s why.
In my view, I am generally (but not always) an active investor. To me, “active” means that I stay in regular communication with the company by e-mail or in person, and that I know the challenges the business is facing, what its needs are, and am actively looking to help the company in any way that I can on a very regular basis.
I have some “passive” investments where I pretty much just read the quarterly investor email and perhaps offer a few comments or suggestions. But I’m not thinking about those businesses on a regular basis. I’ve found that this style of investing conflicts with my personality, and I plan to do less of these in the future. In one case, I’m trying to convert my passive investment into an active one.
But I think there is a third type of investor engagement that is often confused with “active.” I call it “participating” but I’m sure there is a better word for it. I am on the board of one company that I’m an investor in – I think such active roles (board member, employee, consultant, acting CTO) are a whole different level of “active” and deserve their own categorization. In cases like this, I’m much more involved in the operations of the company and can have a much larger influence on what happens from month to month.
When you’re talking to an angel investor, you should try to get an idea of how involved in your business they want to be and make sure it’s a match. I’ve been guilty of saying vague stuff like “I like to be an active investor.” I now realize that it’s best to clarify what that really means and have started to say stuff like “I’m an active and interested investor, but I generally don’t participate in the operation of the business. However, I would consider an advisory or board seat in certain cases.”
Are your angel investors active, passive, or participating? Which do you prefer? Do you use different terms?
Depending on the investor, I either want an active or participating angel. I think early stage companies, especially ones with a relatively “green” management team could really use the extra help and advice.
Ive never had an angel investor, or for that matter, an investor of any type. However if I had an angel investor Id want someone whos active or participating. In the overall scheme of things, I think advice, mentoring and connections are far more important than money. The three main reasons that Id want an active/participating investor are, 1. I can benefit from the investors experience, 2. theres always too much to do in a startup so any help is a wonderful thing, and 3. if things dont go well, then the investor has first-hand knowledge of whats going on.
My attitudes about active investors have changed dramatically over the past couple of years, based on my own minimal entrepreneurial activities. Ive really begun to understand how important it is to have good partners and mentoring when starting a business. The thought of the entrepreneur as a rugged individualist may seem cool, but I think in practice, its nearly impossible for an individual to be successful. I think the benefit of having good mentors and partners is far underrated and the role of investment capital is far overrated. My attitudes and beliefs about this may change again as I go down the entrepreneurial path, but for now, Ill take mentoring over money any day.