Why you need “smart money”


Sunny Dhillon is a partner at Signia Venture Partners in the Bay area. Despite his being a VC, I have to say that I don’t recommend founders follow his advice in the Forbes article How To ‘Hire’ The Right Venture Capitalist.

He groups VCs into two groups: VCs who are happy to just write a check and VCs with experience and expertise. Back in the day this is what we used to call “dumb money” and “smart money.”

Mr. Dhillon writes that:

Founders who already have a complete team in place and minimal risk in their business really only need gas to add to the fire, not necessarily someone to help them put out fires. In this case, the best VC to “hire” is the one who offers the most favorable terms aka the cheap money. You can then bring on people for their experience and expertise later when you really need it.

The only startups that can take just “dumb” money are very successful serial VCs. This  very small group knows what “minimal risk” is – good luck to the rest of you – and probably has built a great team from their co-founders in other ventures. They have a A+ network of investors, advisors, mentors, and peers. They know that given their track record they won’t have a problem raising multiple rounds of capital or tapping into valuable experience and expertise when they need it. And even they will need it at some point.

But if you aren’t a member of the very select multiple successful startups club I strongly advise you not to take the advice to just get dumb money. There are two major reasons: one is raising capital and the other is access to expertise building successful companies market and domain experience, and ability to recruit world-class talent.

Very, very few ventures succeed with only a single round of venture capital. Uber is on their series G. And yes, just like every other startup that isn’t valued at $60 billion, they started with a Series A. So just because you have a team and think you have “minimal risk” doesn’t mean you won’t need multiple rounds of capital. The best way to do that is to start with a VC with both deep pockets and a strong network of peer VC firms. Because VCs like to syndicate their deals to reduce their risks. Often even if they have enough capital to fund you until an acquisition or IPO they will often bring in one of their network to co-invest in a Series B, C or later round. So founders need to think beyond the first round. All four of my VC-backed startups had multiple rounds and multiple investors, including top VC firms and corporate investors like Apple, MIT, and Reed Elsevier. The bottom line is even if you are fortunate enough to find a VC who is “happy to just write a check” the odds are that you will need more than that from your lead investor.

Beyond supplying capital on terms and conditions you can live with – and believe me, Ts and Cs can be more important than your valuation – VCs have varying experience in elements of building successful companies and the partners have different domain expertise as well. By bringing multiple investors into your company over several rounds you will greatly strengthen your network. Finally, you will never know when you will need help! You can start with a great team and traction, but what happens if there’s a falling out with the team? If an 800 pound gorilla like Google or Facebook decides to clone your key feature ,as Instagram did with Snap? If it turns out you are going to need 5X the capital you thought you needed? Don’t judge a VC firm by how they work with you when things are going well, judge them by how they work with founders when the company has problems. That’s why you need to do your due diligence on your investors.

And there’s another value-add that blue chip VCs bring to the table: their network of former founders and top flight executives. As you grow you will eventually exhaust your own network. That’s where a VC can help you find a CFO, COO or other executive needed to really scale the company. It’s amazing the contacts VCs have. At Course Technology I had the idea (not a very good one) that an investment from Apple Computer would add to our credibility in our core market, education. Paul Maeder of Highland Capital, who was brought in on the second round by Bill Kaiser of Greylock, just picked up the phone and called Barry Schiffman, who was in charge of corporate investments at Apple and a month or so later we had a bank transfer from Apple. When we were looking for an outside, independent board member one of our other investors knew the former president of Dartmouth College. Again, with one phone call he was eager to work with us.

Which brings up a final point. I was taught by our investors to keep the board small. So you don’t want or need to give board seats to all your investors. MIT, for example didn’t even ask for a seat; they were happy with observation rights. Observation rights means the investor can attend board meetings but not participate in the board discussion or vote. It’s a great way to tap into an experienced investor’s perspective without having to manage yet another board member.

I don’t know Mr. Dhillon nor Signia Partners and it’s been many years since I raised capital. So please don’t take my word for why I believe virtually all founders need smart money, not dumb money. Talk to your mentors and advisors before you follow his advice, my advice or any advice you are getting from the web, an article, book or video or even your family.





Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: