A friend of mine and active angel investor asked me the following question recently: “I thinking of getting involved in a ‘base hit’ type company, but one that feels like I could really help. It probably won’t be a huge win, but then again I feel confident it will at least work and be viable. I’m just struggling with committing my time, which is of course my most valuable asset. I guess I fear the opportunity cost of not being able to focus on things that could potentially be bigger. How do you reconcile this sort of stuff as an investor? I sent him a long answer which – after I sent it – realized it was a blog post. Following is what I wrote him.
It’s difficult. There’s a natural tendency to over commit and then have to back off. I’ve been through the cycle several times and have ultimately come up with a methodology that works for me. I break down my involvement into three categories: Lead, Active, and Passive.
– Lead: I’m the most engaged investor. I’m often chairman or one of the large shareholders. NewsGator would be an example of a venture deal in this category; Lijit and ClickCaster would be examples of angel deals in this category. It’s important to realize that Lead is not an absolute – a company can have more than one investor categorized as Lead. For example, I’m not the largest % shareholder in FeedBurner (I’m second), but I’d categorize my involvement there (at least in my own methodology) as Lead.
– Active: I’m on the board, but someone else is a more active investor. As mentioned above, in venture deals, the % ownership doesn’t always determine Lead vs. Active. As a VC, I’m rarely simply “Active” (I’m almost always Lead – I don’t do “Active” very well). As an angel, I’m often Active. Me.dium would be an example – Spark and Appian are Leads, but I’m on the board and consider myself in the Active category.
My level of involvement is highest in Lead, still high (but not as high) in Active, and much lower in Passive. In Lead, I’m always proactive about my behavior. In Active, I’m proactive, but usually in the context of “the board” rather than an individual contributor (e.g. Chairman). In Passive, I’m reactive – I’ll help as much as I’m asked and I offer feedback, thoughts, and connections regularly, but I’m not looking for additional responsibility.
I’ve found that I can handle about 10 companies in the Lead / Active category at one time and an infinite number of Passive ones. It took me a long time figure out this split – at one point around 2000 I probably had 20+ Lead/Active companies (including being co-chairman of two public companies) before everything melted down. Everyone is different – I know some VCs that can’t handle more than 4 Lead / Active companies; I know others that much prefer to have ONLY Lead (or Lead / Active) companies (and no Passive ones.) And – I know plenty of VCs that think they are in the Lead/Active category, but really are only Passive + board meeting attendees.
You have to come up with your own approach. At the stage that you are at and given your temperament (at least what I know of it), I’d recommend you go through one over commit cycle. You should be comfortable stretching your boundaries to see what you can / are willing to handle knowing that you ultimately control your level of individual commitments and can back off as you see fit.