Raise from “Dumb Money”? Think Again.

So called “Dumb Money” is smart enough to know it’s dumb.

The past few weeks I have seen this increasingly annoying trend come my way from fellow entrepreneurs: “I got this guy on line 1, never an investor before and he wants to put it ALL in. This is great.”

For the uninitiated (very few with this topic on Medium, apparently) the differences between “Smart Money” and “Dumb Money” are slight but significant. So called Smart Money is not just a check; it’s validation. It’s connections. It’s strategic advice when you need it most. It’s your bridge to an A Round and beyond. But Dumb Money is different. It’s a check for you and usually an ego boost for the investor. It’s a foreign investor parking money somewhere safe. It’s an investor with no startup experience putting cash into a quirky idea. It’s a trust fund brat digging deeper into daddy’s pockets.

Dumb Money is increasingly treasured by entrepreneurs sick and tired of lengthy term sheets, due diligence and the games of more established investors and funds. Just go on Secret and see what I mean. So the panacea, naturally, is Dumb Money. Just get some of that (insert nationality here) Dumb Money and you’ll be set. “Hey, I got Steve Wynn’s third cousin on line #1 and he’s down for $100K! Next up is $1 Mil!” But there is a problem with this. Dumb Money knows it’s dumb.

Stop equating Dumb Money with dumb people. Dumb Money may not be as integrated or have deep sector specific knowledge as institutional investors. But, it turns out, they know this better than you. If they see you are raising an exclusively Dumb Round, they know this. They know the so called collective bias of “following on” is not moving in your direction and will wait until more experienced investors are in the fold. Because many entrepreneurs may subliminally equate Dumb Money to Dumb People, they immediately attempt to raise a Dumb Round off the bat. These entrepreneurs may end up with a few thousand in the bank (cheers for $10K checks!) but in reality, they’re fooling themselves  by believing access to riches is just around the corner.
The only real answer is to have a good mix of capital. Strategic capital that can provide access and connections. And sure, a little dumb money to round out your round. If not, you are setting yourself up for failure. There is no shortcut here. Who’s dumb now?

 

Alex Gold is a Venture Partner at BCG DV Torque and the Founder of Traction, a marketing technology company.  He lives in San Francisco, California.