Dumb Money

An article by Ryan    No Comments

Not all Investment Money is created Equal

There’s no two ways about it, we’re in a tech bubble. It has cooled down a little but there is still a lot of dumb money floating around just looking for somewhere to go. What is dumb money? Dumb money is money provided by people who can bring no other value to you other than money itself. Its often the easiest type of money to get in bubbles as these people are the johnny come latelys who want to jump off the last bandwagon they were on and onto the latest and greatest thing. These types of investors do not understand your market nor do they want to, all they want is to give you money and have you do all the work and get more money back. Dumb money brings very little except high expectations and pressure for you to constantly be moving the graph up and to the right on their timetable.

Why Do People take Dumb Money?

There are many reasons why people take dumb money but I believe the two biggest reasons have to deal with the type of people who become entrepreneurs. First, as Eric Reis states, entrepreneurs operate in areas with very high uncertainty. Getting investment capital makes you feel good. It means someone believes in you or your idea enough to put their money behind you. A type of personal validation. The other reason is often entrepreneurs are arrogant enough to believe that all they need is money and they are capable of doing everything themselves. While this may be true, it is rarely the case and great angels and VCs can offer so much more than just cash.

Dumb Money does not mean dumb people

Dumb money usually never comes from dumb people. If people have that kind of money to throw behind an idea, they are usually not dumb as they got to that point somehow. What makes smart people hand out dumb money is when they try to invest in things they don’t understand. If they can’t understand your situation as an entrepreneur AND your market, chances are you may be accepting dumb money.

 What can you do as an entrepreneur?

If this is your first rodeo, I’d highly recommend bootstrapping your first business. It will allow you to wear multiple hats and find out truly how tough it is to start something and how its even harder to grow something substantial. You’ll discover what areas you’re weak in and need to outsource and what areas you excel at. It will ultimately prepare you better for success even if your first bootstrapped company flops.

If your mind is already made up that you need investment capital, I would highly recommend being extremely selective in who’s money you take. Only take money from people who can directly bring value your company, even if this means turning down money from someone you highly admire.

There are many ways investors can bring value to your company. If you are starting a consumer facing company, find investors who have deep connections with your target market that can bring instant credibility and brand awareness to your company. If you don’t know much about scaling a company bring on investors who have experience growing a team and revenues. If you are starting a B2B business, find investors who are already engaging in commerce with your target market. If its not instantly clear how this investor can benefit you and your company, DO NOT TAKE THEIR MONEY.

There’s a ton of dumb money floating, don’t take it, taking it makes you a dumb entrepreneur.