Editor’s note: This article was first published in January 2013, during Spain’s credit crunch. The references to the current lack of credit reflect that period.
I’ve sometimes seen entrepreneurs who look for smart money for their projects being ridiculed, because some investors take it as a sign that the entrepreneur lacks the knowledge needed to launch the project. So let’s define what smart money is.
By smart money we mean investors who will contribute not only their investment but also their ideas and know-how to help the entrepreneur. That said, a smart investor will always offer smart money, as far as they’re able, because, among other things, it’s the best way to protect their own investment.
An entrepreneur doesn’t have to know how to do everything. Imagine we want to invest in a certain Pablo Picasso. He has a gift for painting, but outside painting, Pablo Picasso has no idea where to start when it comes to selling his pictures. If just any investor puts up the capital, hundreds of very valuable works of art may end up in an attic. But if an investor who knows the art world and has contacts in it offers smart money, both will make a handsome profit from the collaboration.
This brings us to another point. If it weren’t for the current lack of credit and how desperate entrepreneurs are to find funding for their business ideas, they shouldn’t take money from just any investor, because part of how quickly our project succeeds depends on the investors behind our idea and the synergies they can bring us. Let me explain.
Some very well-known online stores managed to get off the ground because some of the investors behind them were either shareholders in or owners of transport companies. That way, they were able to ship their products at no cost at first, and later with very low shipping costs. You could say the investor secured the project’s launch by striking a deal with himself (or with another company he had invested in). Logistics was something these entrepreneurs never had to worry about.
Another example of smart money would be the entrepreneur who comes looking for funding for a restaurant. He’s already found the premises, his business plan is perfectly worked out, and so on. The investor, who owns an office building, trusts the entrepreneur and tells him to forget about the premises he’s found: he’ll fund the project, but the restaurant will open in his own building, since there are no restaurants nearby, and that way he’ll be able to negotiate price deals for the offices in his building.
Other investors have a large network of contacts who could become customers or suppliers for our business.
To sum up: if the same business idea comes from two different entrepreneurs and one of them finds smart money, that one will probably end up more successful than the one who only gets capital, because, as someone once told me: “Don’t look for an investor who can only offer you money, because if they can’t offer you anything else, they’re too poor an investor.”
Of course, with credit the way it is, I’d like to see the entrepreneur who can turn down an investor’s money.
Further reading
- The perfect business plan for raising funding
- With funding scarce, solidarity bonds let customers finance your business
Featured image: Ricard Canals i Llambí, Public domain, via Wikimedia Commons.
