Smart money

7.12.2018

The market launch of an innovative device often turns out to be an expensive undertaking (one may even claim, that it usually turns out to be more expensive than it seems at first). In order to overcome this obstacle, an entrepreneur may decide to acquire a partner who, in exchange for a packet of shares, will raise the necessary capital. The variables in this transaction, which obviously need to be analyzed, are: the sum needed, the number of shares that the entrepreneur is willing to give away, and the terms of the contract he is willing to agree to. However, should he also think about whom he gets the funds from? Emperor Vespasian claimed that money does not stink. Perhaps, indeed, a million zlotys is a million zlotys, regardless of which source comes from? But maybe it is just the opposite – it matters and we should only look for trusted investors among relatives and friends?
Getting an investor is fundamentally different from receiving a grant, borrowing or issuing bonds, because “in the package” with the money we also get a partner whose influence on the development of the company may be positive, indifferent, but it can also be definitely negative. An investor who adds value, knowledge, contacts and business experience in addition to money is often referred to as “smart money”.
Of course, this “partner plus money” package must contain money. The will, commitment and knowledge cannot replace them. The investor we want to obtain must have sufficient funds to finance the development needs of the planned business project. The investor’s limited financial resources can not result in the limitation of the venture’s development.

In addition to money, the investor can bring in two types of knowledge: general business knowledge and industry-specific knowledge. Developing startups is a field in which experience pays off. While each business idea is different and unique, the skills of strategic analysis, experience in the protection of intellectual property and financial management are quite universal.A venture capital fund team, which successfully participated in many ventures, perfectly understands the specificity of startup management, and will not try to run it in a manner appropriate for large enterprises, which is based on strict planning. In addition to general business knowledge, a smart money investor can also bring experience and contacts in the industry. Knowledge of the business ecosystem, the possibility of synergic linking of strengths of companies from the VC’s investment portfolio is another advantage of using “smart money”.

A partner (in this case – a VC fund) profits from the value of the enterprise, so obviously it is in his interest that the value grows. Hence, he is interested in supporting the management team. The question is how much will he be involved in this help with a very small stake of shares and a negligible real impact on the decisions. In this case, will he be determined to save the company in a crisis situation? When choosing between two investors, one of whom will provide us with money, and the other also valuable help, we should consider whether it is not worth it to attract the latter and tie him to the project with more attractive terms of the contract.
At the end – an investor who is really “smart” does not think himself to be smart enough to lead a startup on his own. Yes, he will ask difficult and uncomfortable questions, undermine business assumptions based on wishful thinking, demand detailed information and even suggest possible solutions. He will strive to work out the best solutions, even through heated discussions. But he will not take the burden of developing the enterprise off the founder’s shoulders.