Smart Money vs. Dumb Money: Why You Need Both 2018-11-09T22:04:43+00:00

Smart Money vs. Dumb Money: Why You Need both

The type of money that companies take can either make or break the future plans of the founders and their employees. Putting investment into these two buckets, smart and dumb, runs the risk of oversimplification but adds a shade of clarity to the overly complex world of fundraising.

So, what is smart money and what is dumb money? In the simplest terms, smart money is investment that will have an influence on the operations and strategy of your company and dumb money is investment that is nothing more than growth capital with no real influence on how things are done. Don’t let the categories fool you; Dumb money can be smart, and smart money can be dumb. The key is to know which investment is which and when it’s the right time to take either.

I’m sure everyone reading this has either heard of or have personally experienced an investor who says all the right things and has a track record showing they’ve been through what you think you’re going to go through. This investor would fall into the category of smart money because he/she will no doubt try and help you avoid landmines in your path to greatness. Now, think about what would happen if you had several of these types of investors at the table trying to steer you and your company? Now, think about the cringiest dinner you’ve ever been to where two people are arguing and neither one is willing to concede while you sit there and try to do what is right, and multiply that feeling by a million. That is what it’s like having too much smart money in a small business, and the earlier the company, the bigger this problem can be.

Company power dynamics shift dramatically when you get more people involved. Take a look at what happened with Facebook and Instagram. When Instagram agreed to be bought by Facebook, one of the most important agreements was that Instagram was allowed to run with complete autonomy. If that wasn’t clear enough in the deal, Instagram even opened their own office down the street from Facebook’s HQ. Fast forward six years to just a few months ago, and both cofounders of Instagram resigned from Facebook at the same time, and without a substantial reason, officially. Unofficially, it’s obvious to see that Instagram isn’t what it once was and the cofounders lost their voice in their own company.

If your company has an experienced leadership team, a proven Board of Directors, and a product or service that is tested and gaining traction, more often than not, you just need to pour gasoline on the fire and grow it. This is a perfect situation where dumb money is a smart move because you have all the voices necessary at the table. To go to the other extreme from my Instagram example, take a look at Amazon. Amazon knows what they are doing in every sense of the word and have their strategy down pat. Bezos raised one round of funding ($8M), other than raising a few hundred thousand dollars from his parents, in his second year of operation before going public a couple years after that. Their strategy? Grow, grow, grow, and grow. Sure, some major players have come aboard and helped Bezos achieve his vision but it was always exactly that, his vision.

I know that using two of the world’s largest companies as an example may seem unrelatable but the lesson is no different than a startup trying to raise a $250k seed round or a $50M Series X round. Who you let into your company is always up to you until it isn’t, and you have to live with that decision far after their investment capital runs out. It’s important to remember that equity capital is far more expensive than debt capital and sometimes, the equity capital outweighs it’s expense, and other times, you give up your company for it. One of the best perks of being an entrepreneur is working for ourselves so be smart about what dumb or smart money you take and don’t lose your company in the process.