Dumb Money v Smart Money for Business Investments

You finished your Business Plan. Looks good. Checked the Business Case. Closed the gaps and made the adjustments. Started to write the Marketing Plan. What next? Like all small businesses you need to make that step from the drawing board (business plan) to the high street and the only way to do this is to get funding.

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Startups: Dumb Money and Smart Money is Different

You can’t move from business plans to business planning without cash. Cash is the lifeblood of your business. To make this happen, you need to find people who are willing to buy a share in your business or lend you the money, for example, your local bank.

When you started the focus was on

Where do you go to get the investment?

Or, to be more accurate, who has the cash you need?

The biggest mistake small businesses make is choosing the first person who offers them money and not waiting for a more influential investor, someone who benefits their business in other areas besides cashflow injection.

The mistake is thinking that all money is equal. And it is, sort of.

The money in your wallet is all the same when you go to buy groceries. And no shop owner will turn you down when you take out a hundred dollar bill.

  • From a transaction level, it’s all the same.
  • From an investment level, it’s very different.

How come?

The difference is confusing cash with investment.

  • Cash is what you get from the ATM.
  • Investment is what you get to ‘build’ your business.

And building a business takes more than cash as we’re going to see next.

FYI – sometimes investment is not cash or capital outlay, but that’s for another post.

Where Startups Find Smart Money

The three classic avenues for getting funding as family, friends, and investors:

  1. Family – This is fine for small investments. Your family may give you money as a gift and don’t really expect returns, at least not immediately.
  2. Friends – May have more business experience, especially if you work on a project that relates to your business but things can become problematic when the boundary of friendship and investor gets blurred. Wearing two hats can be uncomfortable.
  3. Investors – This is where we go when we’ve exhausted other possibilities and, if the project is significant, where you should go as you need more funding that your friends and family are likely to offer.

You can see what’s coming next, can’t you?

In the movie The Social Network, one of the pivotal moments is when the founders of Facebook realize that their cashflow is running out and they need to find investors who can continue to keep the business afloat AND also open doors to larger opportunities.

This leads us examining the type of investor you choose.

3 Types of Smart Money

Let’s stop a moment and look at recruitment. Imagine you’re hiring someone for your new business. Do you want someone who:

  1. Wants the job simply to pay the bills
  2. Has a great track record in your industry but is really a 9-5er or someone
  3. Is passionate about your line of business, matches your core values, and has serious contacts

You’re probably going to choose the third.

Why?

Because they’re more than an employee. They will help you through the hard times, come up with creative solutions, and contribute to the business on different levels.

And this also relates to your choice of investor.

When you choose an investor, you’re looking at:

  • Connections – Can this investor open doors for me? How can this person help the business expand? Do they have connections overseas, in Asia, in the government?
  • Endorsements – If this person invests in my business, others are more likely to invest as they trust his/her judgment.
  • Status – Some investors create publicity and buzz on account of their public profile. Giving a small percentage to a high-profile figure in return for the publicity may be worth it, especially if you plan to dilute the shares at a later date.
  • Patience – You don’t want a nag calling you at all hours looking for status updates. An investor committed to the long haul will let you get on with the work and stay out of your hair.
  • Strategic – If your investor is well connected, they can accelerate your business development by recommending your product to other parties. Connections in government agencies can be very effective in this respect.

When you see it from this angle, the cash injection is one part of the equation for small businesses. It’s the other factors that investors bring that you need to gauge.

How Smart Money Increases Business Impact

Now that we understand that there are different types of money, what’s the smartest way to use their connections, status and influence?

For example, investors with ‘reputation capital’.

Investors with ‘reputation capital’ help you in the following ways:

  1. Direction – Seasoned business-people know when to step back (and let you work) and when to intervene when you’re losing direction. For example, Facebook brought Bill Gates and Warren Buffet onboard. Their experience in business negotiations, mergers, and leadership will all contribute to Facebook’s strategic direction.
  2. Credibility – When you’re starting out, you’re nobody. But a partner with ‘reputation capital’ has the status you need. Their credibility gives you credibility by association. The fact that you’re formal business partners will open more doors for you.
  3. Connections – This investor can make strategic introductions for you. From this angle, you’re buying into their network in exchange for a part of your business. Likewise you get access to their Address Book, something you’re unlikely to get before you meet them.
  4. Global Scope – In additional to local connections, seasoned business people will have overseas experience. This accelerates the process of opening offices in different countries and may also smooth red tape or at least show you the mistakes to avoid when partnering in foreign countries.
  5. Leadership – No one knows it all. And while you may a great business plan, your investment partners will shape the future of your business in ways you hadn’t thought of.

Conclusion

Money is money, right? It’s not.

Look at your investors and determine who bring the most to your company… in terms of influence, experience, and connections.

Another point: the ideal business partner will help you develop your product AFTER you’ve launched it as they’ve been through this process before and know what comes next.

So, what do you think? What’s your best or worst story you’ve hear about investors.

If you’ve developed a product from scratch, your focus is on the product development, writing the business plan, and developing a marketing plan. And that’s more than enough for one human being.

So, when you go looking for investment, especially when you’re short of cash, it’s tempting to accept the first investment offer without thinking it through.

[Learn more about these Business Plan templates here]

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