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?