Is There Such a Thing as Dumb Money?

“Dopus. I already had the money in my hand.” – Comicus quote from “History of the World” by Mel Brooks

At times, an entrepreneur is so focused on closing the deal for financing that they forget some of the long-term ramifications. In this scene from History of the World, Comicus is willing to say almost anything to get his weekly stipend. But is this approach dangerous for a business owner seeking financing? After all, money is money and it doesn’t come with a personality — or does it?

We have all heard the expression “smart money”. When one is discussing a successfully funded venture, it is common to hear the phrase “that’s where the smart money is.” Investment advice is often laced with terms such as “that is what the smart money is doing.” While I think you get the point, the question has to be raised: “Is there such a thing as dumb money?” I submit to you that there definitely is. The real question is how to avoid it.

Most owners seeking financing have this uniform image of an investor — serious, numbers-oriented, like Jack Webb (there’s a dated reference for you) they just want the facts. But smart owners do some diligence on their potential partners, and the wise ones know those traits that can come back to haunt you. So here are some warning flags.

Watch out for self-promoters. There is nothing wrong with having some pride in what you have accomplished, but the potential investor who goes on and on about their value proposition, including name dropping like they are some gossip columnist, has to be vetted with a cautious eye. When the next words you expect to hear are “enough of me talking about me; why don’t you talk about me for a while,” it is time to put your private eye glasses on.

The over-promiser is another type to take with a grain of salt. I have been in many meetings where investors are making their pitch and they mention connections they have that can really help the business grow. I can’t count the number of times these conversations resulted in companies accepting these investors, only to find that the two or three contacts they mentioned at that key meeting are in fact the only contacts they have. This is what I call the “big hat; no cattle” approach.

Finally, be careful when confronted by the smartest person in the room. This type tends to look down on the entrepreneur as if they are not worthy to be on the same planet. Without really analyzing the facts, they are quick to point out how something should be done differently and how they will add value by their vast knowledge.

The one common element is: if an investor is really going to help you (besides funding you), they have to understand you. As Stephen Covey advises, “Seek first to understand; then to be understood.” The types noted above may be past the point of being able to listen and understand. And by the way, it is not so much that they are dumb as it is they are not capable of using their smarts effectively. So make sure when you seek investment, you do not get stuck with dumb money because, in the long run, it will be a very painful step in your journey.

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