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Dumb Money vs. Smart Money

The investment community makes a distinction between “dumb” and “smart” money. Dumb money comes from someone who writes you a check but doesn’t understand your industry or care to be involved in its strategic aspects. Smart money comes from people who take an active interest in the success of your business by providing support, including industry knowledge and contacts.

While an immediate infusion of cash can be tempting, starting a successful company takes tremendous effort and expertise. Go for the smart money. Being able to leverage an investor’s expertise could mean the difference between success and failure.

Angel investors are just that: investors, not lenders. They provide interest-free money to entrepreneurs who are launching, expanding, or acquiring a business, in return for part of the ownership of that company.

Because angels are investors, not lenders, if a company fails, the entrepreneur does not need to repay the money. Since most new businesses are somewhat risky, not having to pay back the money if things don’t work out is a very appealing concept for an entrepreneur. But angels know that new businesses are risky too, so before they invest, they’ll want to know exactly how you plan to use their money in order to make your company grow. You’ll need to show them a strong business plan, realistic financials, and a capable team. And after they invest, angels expect regular reports on the company’s progress, as well as the chance to give their own input into how the business is run.

If a company succeeds, the angel investor gets a piece of its profits, a portion of the sale price of the company, and/or shares in the company if it should eventually go public on a stock exchange. As part owner of the company, the angel investor also acquires certain legal rights.

Typically, angels invest from $25,000 to $2,000,000 of their own money. But the best angel investors supply much more than cash. They also offer:

 Business knowledge. Angels often have many years’ experience running and investing in companies. As the founder of a new company, you’ll benefit from their business acumen. Use their expertise to fill in your knowledge base or the skill set of your management team.

 Industry expertise. In many cases, you’re likely to find an angel in the same industry as your new business. They’ll almost certainly have many years of experience, contacts, and a sound working understanding of how things really work in that industry.

 Contacts. Not only do angel investors provide advice, they also provide introductions. Their network will become your network. They can lead you to potential customers, suppliers, lenders, and key employees.

 Support. Angels are on your side. They want your business to succeed. And it’s not just because they stand to gain financially from your success—angels take pleasure in seeing entrepreneurs and businesses flourish. Whether they are semi-retired, invest occasionally, or invest as a full-time profession, a good angel will make the time to support you and your business with technical knowledge, practical experience, and business advice.

 Follow-on financing. Angel investors can support your future fundraising efforts either by investing more of their own money or by helping you find additional angels or other sources of capital.