Active Startup Investors Vs. Passive Startup Investors

How to make the distinction between active startup investors vs. passive startup investors? Are passive or active startup investors best for your venture? How do you reach them?

There are many types of investors and sources of capital that participate in startups today. One of the big differences is whether those investors will be active or passive.

So, what’s the difference between these startup investors? What are the real pros and cons of enrolling each type in your business? Which is right for your venture?

Let’s take a look at each of them, and then how it may impact your fundraising efforts…

Most startup investors can be categorized into active and passive. But, do you need more information about the types of investors you can reach out to for funding? Check out this video I have created explaining in detail your different options.

What Are Passive Investors?

Passive investors are those not involved in the business. They are not active in making decisions, managing operations, etc.

While there may be some blurring of these lines and crossover. These are often what entrepreneurs may refer to as ‘silent partners.’ They are there to provide financial support, in exchange for a return.

While some structures might give them voting rights, they will normally just follow the decisions of the active executives and cofounders in the company. Though entrepreneurs may certainly turn to them for advice on a regular basis.

Examples Of Passive Investors In Startups

The most obvious example of passive investors in a startup is probably early friends and family investors at the pre-seed stage.

They are normally coming in purely to provide financial support. They may not have any domain experience. Though they may be good at managing their own money and have some general business knowledge.

Grants and prize money is certainly a form of passive, non-dilutive capital. It is money that goes in, without having to provide shares or board seats and give up control in exchange for that.

Debt financing is another form of passive capital. Operators are giving up interest and are committing to repayments instead of giving up control. This is why many entrepreneurs may prefer this method of funding their ventures.

The Pros Of Passive Investors

What are the advantages of utilizing passive startup investors in your company? Which is a better option for your new venture–active startup investors vs. passive startup investors?

Maintaining Control Of Your Startup

Probably the biggest reason that entrepreneurs prefer passive investors is to retain control of their business. Meaning you get to call all the shots. You get to make all the final decisions on pricing, styles, partnerships, how to spend the money, and even what and when to bring in more outside money.

If you truly believe you know how to run your company better than everyone else, then it is understandable you will prefer this path for funding your startup.

There are certainly others who have seen active investors destroy their companies, and even boot them out of their own startups.

Accessing A Broader Investor Base

Another huge benefit of passive investors is how much larger your pool of potential investors is.

Clearly, there are only so many people in the world that are capable enough that you’d actually want to be involved in your business operations. Some of those certainly bring a lot of pooled capital from their own base of passive investors. Though you can only afford to have so many active investors. As they say, “too many cooks spoil the broth.”

Depending on your corporate and fundraising structure and the regulations you are operating under, virtually anyone in the world can become a passive investor in your business. That means access to far more money.

In the case of crowdfunding, startups can get an early head start on enrolling customers while simultaneously bringing in funds. This can apply to retail consumers as well as strategic corporate and enterprise partners.

Creating Win-Wins For Those With Capital

There is a lot of good you can do, and much impact you can have as an innovative entrepreneur and business owner. This not only includes the people that you touch with your product, and their families, but also how you impact your team members’ lives, vendors and suppliers, and investors.

If you are successful, you are providing those with the money a valuable service. You can give them a safe place to park their capital, which is managed well and multiplied. An opportunity to give back to them, and those that may have the money, but not the time, vision, or expertise to really do what you can do.

The Cons Of Passive Investors For Startups

Of course, nothing in life or business is without its cons or disadvantages as well. How would you choose between active startup investors vs. passive startup investors?

The Weight Of Investor Management

You may be able to bring in thousands of more passive investors than active ones. Yet, doing that directly can also bring a huge burden of investor management. You have to update them all, provide great customer service to them, and more. It can be at least a full-time job on its own, if not requiring a whole additional department in your business to deal with. This can be a cost and distraction. Certainly, as you grow you will need to declare larger minimum investment amounts to make it worth it.

Passing Up On A Lot Of Value

Many experienced repeat entrepreneurs still bring in outside investors, even though they have plenty of capital to self-fund a venture from a previous exit. This is often mostly because they understand and appreciate the great value of bringing in others.

In some cases, this may just be adding the credibility of a name brand investor, even if they remain passive.

Though there is immense value and competitive advantage to be found in bringing in investors with domain and business expertise, and powerful connections. Those that are excited to be involved, are invested in your success, and can fast-track your progress. Often achieving in hours what it would take you years to do on your own.

It may take money to operate a startup. Though, if you can get all of this extra value and help at the same time, it is worth considering.

You’ll Still Need Extra Help

If you don’t get the above help from investors along with the money, you’ll still have more work and expenses to get that same help.

In some way or another, you will have to pay for that knowledge and connections, and to establish your position in the market.

It may be by giving away equity to advisors, hiring and paying more salaries and benefits, or paying for coaches.

What Are Active Investors In Startups?

How are active investors different from passive ones for startups? What are their pros and cons? How would you distinguish between active startup investors vs. passive startup investors?

As the name suggests, active investors are those who will play some active role in your company, in addition to bringing money to the table.

This may be in the form of holding a job or executive role, which involves daily involvement in productivity and operations. Or it may be in the form of being board members, who are involved in molding the company, directing it, and voting on major decisions. Including when and on what terms to accept more investment, or when to exit the company.

Examples Of Active Investors In Startups

Active investors come in many forms, and at different levels of participation.

Early business partners, including your cofounders, may be active investors. They may bring in money, but also want to have significant control over business decisions, or even daily operations and spending.

Startup accelerators may also be considered a type of active investor. As they not only provide seed money, but will put you through a fast-paced program, in which they will direct you, and push you to make progress.

Later on, angel investors and venture capital or private equity firms may also act as active investors. Typically through their role on your board. They may be more or less active or passive. Though have the ability to carry a lot of weight in major decisions, if they decide they need to act to protect their investment or increase their returns.

The Pros Of Active Investors

There are a couple of notable benefits of enrolling active investors in your startup.

Easing Your Workload

There are an enormous amount of time-consuming tasks facing startup founders. Time is of the essence. Enrolling active investors can help ease this workload, and multiply what you can achieve in the same period of time. All without having the burden of more big salaries. The type of talent you can get from active investors may be worth high six and seven-figure salaries and bonus packages. Yet, they are bringing in money too.

Credibility & Trust

Bringing in active investors with more business and domain expertise can add a lot of credibility to your company. It can establish trust for other investors and customers. As well as boosting your brand, and perceived company value. This visibility and credibility are two of the things which newer businesses struggle with the most.

Decision Making

The right active investors can bring highly valuable guidance and experience to your operations. That can mean fast-tracking and better decision-making.

They bring big-picture thinking and know the mistakes to avoid.

The Cons Of Active Investors

What are the potential cons of bringing in active investors? Active startup investors vs. passive startup investors–which option has more downsides?

Time Management

Active investors can require even more engagement than passive startup investors. You can expect to be speaking with them much more frequently, debating more elements of the business and decisions, and having more meetings. All of which can eat up a lot of your very precious time.

Control

One of the biggest turn-offs of active investors for startup entrepreneurs is the trade-off in control over the business and decision-making.

If you haven’t been very careful and intentional about choosing the right active investors, they can make many decisions that you don’t agree with.

They can begin running the company on their schedule, for their own interests. Leading to poor customer service. They may choose which metrics to focus on, when you can conduct fundraising, and when to exit, and the terms of that exit.

If you are not careful, this can rob you of all the most important reasons you began on this venture in the first place.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

How Fundraising May Differ Between Active & Passive Investors

1. Who You Target
2. Your Pitch Deck
3. Where You Go Fundraising
4. How You Structure Your Capital Stack

Which Type Of Investor Is Right For Your Startup?

The reality is that startups can benefit greatly from having both types of investors in their businesses.

Much may depend on the stage of business you are at, the gaps you have, and be based on your individual vision and goals.

Passive investors may offer more freedom and a much larger pool of funds to pull from. Whereas active investors can bring far more value, and help your company grow much faster. Though much of this will rely on picking the right investors.

You may begin with some early pre-seed passive investment, then bring in key active investors, before again embracing more passive investors at scale.

Summary

There are many sources of funding for startups. Active startup investors vs. passive startup investors are one of the big differences and choices facing startup entrepreneurs.

Each has its own pros and cons, and roles in your venture. You may even use a combination of these investors as your company evolves and grows over time.

Just understand how they differ and be intentional about those you bring in.

You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.