Arm’s Length vs. Hands-on Investors: Which is Right for Your Startup?
The world of startups is a complex animal and one that’s subject to the odd mood swing or two. With rapidly-shifting consumer tastes, volatile, agitated markets and seemingly light-speed global tech innovation, picking a startup winner is as tricky as finding a needle in a needle stack.
From the specific industries that find success, to the factors that success is judged by, throughout the last decade, investors have enjoyed a heavy hand in decision making and ultimately what’s considered a pass or a fail. The investor landscape itself is, however, experiencing its own changes, and many of those writing the checks are adapting their own approach to maximize their chances of seeing returns.
THE HANDS-ON INVESTOR
For entrepreneurs who may have stood up on their last day of gainful employment and told their boss what he could do with his “obligatory mentoring program,” few things could be more stomach-churning than a “hands-on” investor. When you hear talk of the “strings attached” to money, this is what is being talked about.
Even the most easygoing of entrepreneurs are often reluctant to give up portions of their company, much less actual control. While “control freaks” might be a little too strong a description, hands-on investors are commonly keen to strap themselves to their board seat at an early stage and give day to day operational “advice.”
At later stages of development, this level of involvement can be a very desirable situation. Often larger, later stage investors will occupy board seats and be called upon by entrepreneurs to seek advice. In the early days of a startup however, it can be similar to having parents at your prom.
ARM’S LENGTH INVESTORS
On the flipside of hands-on investors are those at arms length. These commonly represent the style of investor every entrepreneur thinks they want to be in business with. They rarely pick up the phone to get involved in day to day operations and rarely answer the phone when a startup needs guidance.
While no investor would actively invest in a company and then dismiss it, typically the arms length investor is one that, at an early stage, takes a shotgun approach to their investments. They likely have many that vary, versus the selective few of the hands-on investor so, while they offer the entrepreneur much of the freedom they want, they tend not to offer the support a startup may need as it grows.
THE RISE OF OPERATIONAL SUPPORT
Recently there has been a new trend gaining momentum which is seeing investors seeking to find the optimal happy medium between the two differing approaches.
Operational support investors are those that will look to get involved on the ground floor of an investment but aren’t compelled to involve themselves in its day to day management. While providing money to fund growth, they also lend support in other ways, from recruitment, HR services, networking/introductions and legal help—commonly areas that can hamstring a startup’s growth.
The aim of an operational support investor is to find the balance between micro and no management. Their goal, to increase their returns by helping the startup succeed. Many of the new breed of investors working in this way are former entrepreneurs who understand the tight rope that needs to be walked between creating success and impeding growth. They are therefore able to use their experience and position to help propel their investments while also being a source of steady guidance whenever the next market mood-swing beckons.
Cameron Chell is the founder of Slyce, which just raised a $3.75 million seed round.