Which is better? Hands-on or hands-off investors?

Are we hands-on or hands-off investors? The answer is yes.

The question is usually presented as if it were binary and a constant state of being across companies and situations. But every company is unique and even the same company goes through a variety of different situations over time, requiring different levels of engagement from investors.

Investors who would like to be completely passive and simply invest money are better off investing through a fund, syndicate or angel group. Similarly, at the other extreme, people who would like to be involved with every single decision made by a company because of their operating expertise probably should be operators rather than investors.

That leaves a sizeable middle ground with a more interesting question: what factors should influence the level of investor engagement?

What are the consequences?

Stating the obvious, there are typically key inflection points for every company. These can include decisions about team, fundraising, product, business model and external partnerships, so it is not necessarily in one specific category. Rather than trying to make decisions for founders, the best way investors can add value is to help teams reflect on their decision making process.

If the founders are choosing between business models, investors should be able to help. If the founders are choosing between business cards, just get it done.

What is the level of uncertainty?

When a decision is important and also has a high level of uncertainty, investors can help teams to explore scenarios in more detail. This can include providing personal context, researching background information or identifying key assumptions. Once again, the emphasis is on process rather than conclusions.

When choosing to enter a foreign country, investors with cross-border experience can help reduce the uncertainty. Understanding the nuances of local culture is hard to do from media reports alone because the media focuses on the extraordinary rather than the ordinary.

When is the timing?

Many of the most challenging decisions have important consequences, high levels of uncertainty and significant time pressure. In these cases, there is simply not enough time to do all the necessary research. Investors can add value by referencing rules of thumb that have worked in the past which may be relevant. These rules of thumb should be based on process, not the final answers. Just make sure that you have investors who respond quickly because no amount of experience can help if they don’t respond in time.

During last minute negotiations with strategic partners, it is easy to get caught up in the moment, especially with sleep deprivation. Experienced investors can help to decide the difference between tough negotiations and simply an unfair deal.