Whenever an entrepreneur asks me for advice about raising money, one of the first things I want to understand is what the money is going to be used for, and if they have a specific plan. After that’s out of the way, I like to understand if they want money with or without help. What I mean is do they want investors that will actively add value (smart money) or do they just want money and nothing else (dumb money).
Here are a few thoughts on smart money and dumb money:
- Some entrepreneurs actively want investors for the accountability that comes with having a board, and that should be part of smart money
- Most VCs want to be smart money and are actively involved
- When talking to potential investors explicitly ask how they like to help their investments and set expectations before closing an investor
- Check investor references from their other portfolio companies to see how much “help” they actually provide (are they really smart money?)
When raising money, it’s important to consider the smart money and dumb money question. Not all investors are created equal and entrepreneurs would do well to understand the types of value-add investors can provide.
What else? What are some more thoughts on smart money and dumb money?
David Cummings on Startups 
Glad to see that someone else uses the exact same vernacular. I used to feel squeamish thinking this way and realized anguish entrepreneurs faced with a bad match. There have been two local angel groups who constitute the poor end of the classification.
For early stages I too feel all money needs to be smart money, its simply now another part of the entrepreneur equation/dynamic. Would you say that in later stages, dumb money (money invested simply for an expected return) is necessary or simply not optional?
New Entrepreneurs focused on a dream, knee deep in the “technology” and practical issues of launching a MVP are not aware of the difference, or the need to understand the difference. In the “launch checklist’ for entrepreneurs this needs to be discussed
I would say there’s smart money, dumb money and just money.
Dumb money would be someone who is taking an active position (i.e. calling you, the entrepreneur, often) but has misconceptions of how startups grow. An example of this could be, say, an accountant who watches the financials closely and doesn’t understand A) why you’re burning cash every month and B) why you’re investing into product development even though you’re not cash flow positive.
So an entrepreneur should avoid dumb money in all cases, because it’s a waste of time.
Separately: In general, you’ll want to focus on money that can make introductions and open doors, whether or not that money comes with someone who wants to actively advise.