What is the definition of ‘active’?
What is the definition of ‘passive’?
If you are raising seed or early stage funding, do you want ‘active’ investors or ‘passive’ investors? For an entrepreneur in a start-up this is an important question.
First, start out by defining your preferred investor profile. Do you want investors to have knowledge and expertise in your specific industry? What about specific professional expertise in finance, marketing, operations, sales, technology, etc.? Do you want to receive feedback on an ongoing basis from your investors or would you prefer to give just a monthly or quarterly update? None of the options are wrong. You just need to know what you want before your start to engage with potential investors.
The flip side to this equation is asking the investor how they see themselves contributing to your venture … across the spectrum from ‘only investing’ to ‘stepping in’ to help run the marketing department on a daily basis until you find a full time person.
Make sure you have a clear understanding of what ‘active’ and ‘passive’ means to you, your management team and to the individual investors. I learned early in life that everything is relative to the position from which a message is given.
Which compliment below carries more weight?
Your best friend with no software development experience states, ‘John is a Rock Star software developer’.
- or -
Steve Jobs states, ‘John is a Rock Star software developer’.
I think you get my point.
Entrepreneurs – Know what kind of investor you are looking for and know what your definition of ‘active’ and ‘passive’ is.
Investors – Know what you bring to the table from a knowledge, skill and experience standpoint for companies you want to invest in and know how ‘active’ or ‘passive’ you want to be.
The founder of a start-up was getting weekly calls from one of his smaller investors. Week after week this continued for three months. Finally, the founder stated, ‘I thought you said you were a passive investor and didn’t want to be involved in the business’. The investor responded, ‘I am passive and I don’t want to be involved but I want to know how my investment is doing’.
Perhaps a little extra communication upfront about expectations and roles would have been helpful after all.