Question: How do you decide whether to take an active or passive role in a company you invest in?
As VCs, we must balance exposure with ownership and bandwidth with support. As a result of this balancing act, there have been two main investment models that have emerged for early stage venture investing:
1) Make a small number of larger investments and become actively involved in guiding those companies – provides a VC firm with deeper understanding of the business, opportunity to add additional value, and risk mitigation
2) Make a large number of smaller investments in a passive role and rely on others to help guide those companies – provides a VC firm with portfolio diversification, market exposure, and optionality to make follow-on investments in “winners”
VCs typically choose one model over the other as it is very difficult, near impossible, for a VC to make a large number of small investments AND become actively involved in the development of those companies (without a large staff). There simply isn’t enough bandwidth, even for the most skilled investor, to do both well. On the flip side, a VC making a small number of large investments cannot afford to sit back and rely on others to determine the fate of their investments because of the impact each investment has on the overall fund.
There have been successful VC firms taking either approach. For example, the Foundry Group makes only a handful of larger investments a year but take an active approach to each investment (even smaller deals). 500 Startups may make 50+ new investments a year but in a passive role for each company. The vast majority of traditional venture capital funds are active investors who typically have a larger ownership stake, require certain protective provisions, and want a board seat. Hedge funds or secondary funds will typically take a more passive role in early stage investing and rely on existing investors to help guide the company.
We believe there is a big benefit in taking an active approach and “making our own luck”. By focusing on a smaller group of companies, we can actively support the entrepreneurs we back by helping them attract great talent, opening doors to potential customers, leveraging our experienced operating venture partners such as Carter Cast, Dave Habiger, and Kevin Willer, as well as other strategic connections within the Pritzker Group network.
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