Startups by their nature are doing business in a new way; No investor can have just the right sort of experience to understand the entrepreneur’s situation exactly
e27 co-founder Thaddeus Koh decided to troll his readers last week by asking,
At first I thought that, well, smart is better than dumb. That was a mistake. Always take the dumb money.
Just to get a little set-up out of the way, smart money refers to funding from better-connected, better-informed, or just more experienced investors. Dumb money refers to the opposite. Dumb-money investors have to pony up much more cash just to get a foot in the door. At least, that’s the idea.
Some pearls of startup wisdom are actually just the grit in the oyster — annoying, useless and will never turn into a pearl. Like being a dog or cat person, this smart-money dumb-money distinction has no meaning. Loving, animal-friendly people will tend to appreciate both creatures, beautiful in their own way. Likewise, investors are mostly smart people who can always bring something to the table. It’s a false distinction.
If you believe that I am mistaken, and are convinced that you have met the flag-bearer for dumb money before, I’d be happy to be corrected with a private message. I would be skeptical though, because financial endeavours are unusually good at chlorinating the pools of liquidity. Cash-rich fools don’t tend to stay cash-rich for long. Foolish decisions are met with a swift demise.
Even entrepreneurs benefit from dumb-money. Dumb-money (theoretically) has to pay more to join a round, which gives the portfolio company more capital to grow. If and when the investor goes bust, the higher average intelligence of the investor pool is better for all entrepreneurs as well. It’s a win-win!
Also read: [Discussions] Are VCs funding the entrepreneur lifestyle or a sustainable business ?
It boggles the mind why anybody would say no to dumb money. Certainly there is a risk that the round overvalues the startup so much that successive rounds are difficult to close. If we are honest with ourselves though, that risk exists for so-called smart money, as well. It is the nature of venture capital.
Perhaps more importantly, a startup founder that accepted funding on an unrealistic valuation surely has to accept some blame as well for the bad decision.
My favourite reason for why dumb money is my preferred choice is that startups are hard. I expect to make mistakes. I’m bootstrapping my own startup in coworking spaces, total cost so far — S$25 and close to 50 hours. Careful husbandry of limited resources is the startup survival mantra. Any extra resources are welcome. Smart-money investors may tell me that they have the wisdom of years to guide me, but I would be unmoved. Startups by their nature are doing business in a new way. No investor can have just the right sort of experience to understand the entrepreneur’s situation exactly.
I remember a time when I was in the games arcade playing platform games as a kid. When you’re a kid playing games, coins are always in short supply. Even when I had a friend playing armchair general, maybe he had played a similar game, but not the same one. I always just wanted more coins. Now, as before, just get more coins!
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