Silent business investors are individuals who invest money into a company but remain silent or absent from daily management. They share the profits and losses, and may provide connections or contacts to help the business thrive, but they do not work directly for the company. Like loans and grants, funds obtained through a silent investor must be repaid. The expectation is that the money provided will yield a profit for the investor.
Role of Silent Business Investors
What do silent business investors do for a startup? At first glance, it may seem obvious - they provide money to help you start your company. Silent business investors, however, may do more than that. They may provide capital, or the collateral to obtain a business loan, and connections to smooth the way for a new business venture.
Silent Investors vs. Silent Partners
A silent investor is somewhat different from a silent partner. A silent investor provides money, but typically has no personal involvement in how the company is run.
- Silent investors provide money, but may not necessarily be an actual owner of the company. Silent investors are more akin to angel funding. Angel funding or angel investors are typically wealthy people who lend money to entrepreneurs with the expectation of return on their investment. Like the silent investor, the angel investor doesn't want or need to run the business or have a say in how it's run. He or she just wants to get their money back with some interest or profit.
- Silent partners are actually business partners in every legal sense of the word. The two partners share equal responsibility for the debts and assets of the company. Just because one partner is silent, or out of the daily running of the business, doesn't absolve them of the responsibilities of the company. Silent partners, like silent investors, infuse cash into the business, but they also bear legal responsibility for the activities of the company.
Start-up costs for any new business can be formidable, and many entrepreneurs with great ideas lack the money to fund their new business. A good rule of thumb when estimating how much you think you'll need for your new business is to double, or even triple, the expected expenses to ensure a sound cash cushion. Many silent investors provide the seed money to help a business get off the ground. Sometimes this comes from their own personal assets.
- When entrepreneurs start their businesses, they generally ask family and friends for money first. Family and friends, however, can usually only raise a portion of the cash needed to start a business.
- The entrepreneur may be able to secure some business loans based on personal capital, but these too can be exhausted.
- That's when many entrepreneurs seek help from silent investors or angel funding for additional capital.
- A silent private investor may provide money from his or her own pockets, or may be able to secure additional loans or lines of credit.
Connections and Contacts
Silent investors may also provide the connections and contacts vital for a new business. Some markets and industries may be closed to newcomers unless an insider brokers connections. They may use their substantial network to help a newcomer find suppliers, subcontractors, or customers.
How to Work With Silent Investors
If you're an entrepreneur or would-be entrepreneur, this may sound like a wonderful opportunity to get more cash to fund your dreams, without having the annoyance of a business partner who wants to tell you how to do everything. Before you jump into such an arrangement, be sure to take the following steps to protect both yourself and the silent investor.
When working with a silent investor:
- Manage expectations: Be sure to spend time hashing out the details of your arrangement with your potential silent investor. Communicate expectations clearly.
- Explain the risks: All new businesses come with substantial risks. Since silent investors share both the business profits and losses, they must be well aware of all the potential risks connected with their investment. Silent investors shouldn't invest more in a business than they're willing to lose.
- Get it in writing: Have an attorney draw up a silent investor agreement or contract that will stand up in court. Although your investor may be your best friend now, nothing can hurt a relationship faster than a business deal gone bad. A contract ensures that you both have recourse if things go bad. It also spells out in writing the understand between the parties in such a way that if there is a disagreement, it can be settled through arbitration or litigation. Successful entrepreneurs leave nothing to chance or the imagination, but put everything in writing.
Where to Find Silent Investors
Finding silent investors isn't easy. Most people who need to find silent investors do so by reaching out to their current business contacts and requesting assistance or referrals to potential investors. Another way is to work with local business associations. Some have sign up systems where you can put your name in and interest in obtaining a silent investor, and if anyone is interested, they'll connect with you. Try your trade associations, business connections, and friends in the industry to find a silent investor.