My client asserted that smart money is the best way to grow a start-up. In addition to capital, smart money may provide infrastructure, personnel and the input of boards of directors and advisers. These boards provide additional expertise and guidance. Moreover the optics or perception of their association with the start-up increases the venture’s curb appeal and chances for success.
Dumb money, he cautioned, isn’t pejorative; it merely describes a cash investment with little or no oversight of the actual use of the funds other than initial approval of certain elements, cash flow and the overall budget.
To be fair, it’s like comparing apples and oranges. Smart and dumb money deals are structured in different ways to address different risks and expected returns of very different investors. Nevertheless, I was struck by the disparate thinking of movie producers and start-up entrepreneurs; film financiers and venture capitalists in their capital preferences.
My start up client preferred working with smart money from VC investors because he could leverage greater resources into the growth of his company than he could with the same amount of dumb money.
I explained that smart money is anathema to movie people unless it comes with distribution and even then, they’re never thrilled with an investor armed with approval rights over talent, budget and distribution. Dumb money shuts up and stays out of the way.
That said, we both agreed that if an investor offers up smart money, dumb money or any other kind of money, take it (provided it’s legal).