Smart Money vs. Dumb Money

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One of my web start-up clients recently extolled the virtues of smart money over dumb money.

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).

  • Nice writing style. I will come back to read more posts from you.

    Susan Kishner

  • Nice writing style. I will come back to read more posts from you.

    Susan Kishner

  • Great article. Thanks for posting. I have three
    questions:

    1.) What kind of cash or money is illegal? Please give an example.

    2.) Is there really that much money out there for start-up entertainment businesses?

    3.) What kind of “strings” are attached to start-up money?

  • Great article. Thanks for posting. I have three
    questions:

    1.) What kind of cash or money is illegal? Please give an example.

    2.) Is there really that much money out there for start-up entertainment businesses?

    3.) What kind of “strings” are attached to start-up money?

    • Dorothy,

      1. There are many types of illegal money; the most obvious being money from illicit activities such as money from drug dealers or organized criminal sources in which case there’s a significant risk that the money is being “laundered” or cleaned through the investment.

      2. Hard to say how much money is out there in general. To be sure, the credit markets are tightening but investors with cash are looking for new places to invest now that real estate is out of fashion. It all really depends on the risk vs. reward to the investor.

      3. This too varies. With dumb money, the condition on the investment can be limited to the right to recoup the investment plus a “vig” or return on the investment. Smart money usually requires additional controls such as approvals of personnel, business plan, business partners, etc.

  • Dorothy,

    1. There are many types of illegal money; the most obvious being money from illicit activities such as money from drug dealers or organized criminal sources in which case there’s a significant risk that the money is being “laundered” or cleaned through the investment.

    2. Hard to say how much money is out there in general. To be sure, the credit markets are tightening but investors with cash are looking for new places to invest now that real estate is out of fashion. It all really depends on the risk vs. reward to the investor.

    3. This too varies. With dumb money, the condition on the investment can be limited to the right to recoup the investment plus a “vig” or return on the investment. Smart money usually requires additional controls such as approvals of personnel, business plan, business partners, etc.

  • Smart…good
    Dumb…bad

    • Steve,

      Smart money is no better or worse than dumb money. They each work best on certain types of transactions.

      If you want capital investment with minimal interference then dumb money may be right for you. However, if you need the experience and oversight that only a financier can provide, then you may want to consider smart money. Smart money may also be more likely to make additional investments down the road.

  • Smart…good
    Dumb…bad

  • Steve,

    Smart money is no better or worse than dumb money. They each work best on certain types of transactions.

    If you want capital investment with minimal interference then dumb money may be right for you. However, if you need the experience and oversight that only a financier can provide, then you may want to consider smart money. Smart money may also be more likely to make additional investments down the road.