Entrepreneur Myths (22 page)

Money cannot think. Money is like a man’s penis. Money loves to get around and around, but it has no brains

When an entrepreneur tells me they’re looking for smart money, the first thing I ask is, “How the fuck would you know if my money is smart?” They stutter and tell me my money is smart because of my experience. My classic response is that my money is dumb money because I can’t predict the future. If I could, I wouldn’t be fucking talking to them. I’d be bigger than Warren Buffet. Dumb money or smart money — it doesn’t really matter. What matters when taking any type of money is that you don’t have a bunch of armchair quarterbacks telling you how to run your business, unless you seek their advice.

By now, I hope you’re smart enough to realize that my money is not smart money. It’s smartass fucking money.

Getting smart money for your venture has major disadvantages. Be cognizant that smart money believes they know everything, and has an answer for everything. You see, that’s why their money is so
fucking
smart.

Entrepreneurs are disillusioned if they think smart money will help them beyond investing into their venture. Most of the smart investors talk a good game, but they don’t have time to roll up their sleeves and help you take your business to the next level. They expect you to do it and I don’t blame them. It’s your baby. Your vision. Your venture.

My attitude after I invest: You got my money, bitch. Now get it done, motherfucker. Make me richer.

I invested into an enterprise software company, and the number of smart investors they had was incredible. The company even had a board full of smart money and smart people. I learned quickly that smart money could be really smart-
alecky
. I served on more than 10 boards in my life, but I’ve never seen so much smart money jerk off, backstab each other, and not do shit. This board loved having board meetings. During my board tenure, I saw so many broken promises and undeliverables — it was beyond my comprehension. But, damn it, it was smart money.

Give me some fucking dumbass money that doesn’t want to be a backseat-driver entrepreneur, knows the risks associated with their investments, and only wants to help when I ask. I’ll take that dumb fucking money all day long.

I’ve pitched people for money only to have them give me attitude on how smart their money has been. Let me repeat, and bore you again with this statement:
predicting the outcome of any event is extremely difficult
. Some venture capital firms had major hits from investing into Apple, Google, Facebook, Twitter or Yahoo. But this kind of smart money is as much lucky money as it is smart money (See Myth 57). Venture capitalists need luck especially in Silicon Valley because major venture capital firms are all fucking smart, and there are only so many good deals out there to be funded. When smart money competes with other smart money for your deal, it becomes just money.

If your company is hot, then most likely every VC wants to get in your pants and invest. Of course, they will tell you their money is smart money. It comes down to them convincing you that their money is smarter than other VCs money.

If there is any smart money out there, I believe a good portion of it comes from experienced angel investors. If you’re lucky enough to get smart angel money, you are fortunate. Because angels are entrepreneurs, or past entrepreneurs, they’re more likely to be management and operational-minded than most venture capitalists. However, not all angel money is smart. The more experienced the angel is at investing, the smarter the money.

Whether smart money or dumb, make sure the money is honest money. You don’t want a clusterfuck situation where the money ends up being dirty money from unscrupulous organizations needing to launder their money through your ethical venture. Now that would not be smart.

Brain Candy: questions to consider and ponder

(Q1)
If you believe smart money is important, then how do you know smart money when you see it? And please don’t tell me it’s because of their investment track record. For instance, Kleiner Perkins, a prominent VC firm with lots of smartness didn’t invest into Facebook.  And investing is like soccer. You’re only as good as your next game.

(Q2)
If you don’t like to take dumb money, what do you consider dumb money?

(Q3)
Do you think Geico money is smart money or dumb money? It sure looks fucking dumb to me, but what do I know?

(Q4)
How do you handle smart but lazy money? Do you continue taking the smart money despite the “smart” investor not following through on promises to help you grow the business? Do you just take more money and run, without their help?

(Q5)
What are the key determinants of smart money or dumb money?

(Q6)
If your family and friends (FAF) invest money into your venture despite not knowing one fucking thing about your business — is their money considered smart or dumb because they invested into your smart ass? Is your parent’s money smart money or dumb money? What about your sister or brother?

Entrepreneur
Myth 33
| Take the money, take the money and take the money

A brilliant entrepreneur friend of mine in San Francisco has this rule for raising capital: Take the money, take the money and take the money. This guy has neurons coming out of his brain but in this particular case, I don’t agree with him.

This guy has raised a substantial amount of money from good people, including me, so I can see his position. But based on my experience, you have to be very, very, very careful whose money you take as an investment or loan and at what valuation. Did I emphasize
very
enough? If not, read it again. And read it again.

I can tell you some fucking horror stories. I’ve turned down money from investors because it just didn’t feel right. When you take money from an investor, make sure you’re fully aware of the consequences of receiving that money. No matter how much enthusiasm and belief you have in your venture, the odds are stacked against you in making it big. Make sure your investors don’t come after your ass if they don’t like the direction the business is going. Be extremely cautious in making any promises regarding revenues, timelines, sales pipeline, costs and any liabilities that will occur during your venture.

While running my venture fund, I made investment decisions quickly because I spent time developing psychological profiles on entrepreneurs. As an entrepreneur, you should develop psychological profiles on the investors to make sure you’re taking the right money.

When conducting due diligence on investors, make sure they really have the fucking money. Yeah, that’s not as easy to verify as you might think. I can’t tell you how many investors claim to have the money when in reality they don’t have shit. Look for answers from investors to some of the key financial and investment questions outlined below.

Don’t be fucking bashful

Ask the investor how quickly they can deploy their capital. How many investments have they made in the last year? If they’ve made none, then most likely you’re not going to get money from them either, or maybe they’re just slow decision makers.

How quickly will they make a decision to invest? If it is going to take six months, forget it. Just keep them on your Christmas card email list for later rounds. Find out what stages of the venture life cycle they like to invest? If you need seed capital and they only invest in later stages, like the Series B or C, the odds are you’re not going to get their fucking money.

What sectors have they invested in previously? What sectors will they invest in moving forward? How much capital can they deploy right now? How much capital can they deploy over the next 12 months? Who is their attorney? Are they going to look at the investment themselves, or will someone else on their team review the documents? What is that person’s background? How much does their decision count in the investment process? Are they relying on some bullshit consultant to help them make the decision?

How does the investor, if they currently have portfolio companies, manage their investments? Are they hands off or hands on? Can you talk to one of the entrepreneurs who received an investment from them?

It’s a two-way street when it comes to taking or giving money

The investor is going to do due diligence on you, and you should do due diligence on them. Do they have any lawsuits against them? Has the investor ever been in jail? Are they suing anyone? Have they been sued? Have they been sued more than once? What’s said about them on the internet or in the traditional media? Are they using their own money? Are they using other people’s money? Where do they get their money? Does the investor have a criminal background? Has the investor made their money in legitimate ways?

During the first internet boom, one credible source introduced me to investors in New York City. He took me to the meeting, which was held in the investor’s high-rise apartment. As we rode up the elevator I noticed the person escorting us to meet the investor was an exceptionally large, burly guy. Hmm, I wondered if he used to be a Russian weightlifter. My dad had been a champion weightlifter, so I asked this guy if he was one. “Hey, were you a professional weightlifter?” I asked. He smirked and shook his head no. I felt uneasy as we followed this non-weightlifter, who looked like a fucking Olympic champion into the apartment. And it was a beautiful place, decked out with exquisite art and furniture. I remember the ornate grand piano like it was yesterday. It must have been a top-of-the-line Steinway. We sat down, waiting awkwardly for the investor for about five to ten minutes.

Finally, an Italian guy in his 50s or 60s entered the room. I felt like we were in
The Sopranos
. We gave the investor presentation pitch on our graphics technology anyway. During the presentation, the Italian guy fell asleep briefly (it was right after lunch). I’m thinking we should get the fuck out without him noticing. Unfortunately, the big guy was standing by the exit. However, the old guy woke up suddenly and told us he would invest into the venture because they wanted to apply the technology to their 30 or so porn-related ventures.

What would you do? We found out this guy had a Mafia background. We politely turned him down a few days later because this is the type of a guy you don’t turn down to his face — you exit gracefully and run like hell. We escaped a major cluster-fuck. The old guy continued to call us after our meeting, asking to invest. He was smart money when it came to knowing the value of our technology. Smart but dangerous money — for sure.

Be very careful about taking money from people. If the venture fails, you might get sued, or worse. I don’t want to scare you with my stories, but don’t be fucking naïve about taking investor money. Don’t ever forget that it’s a serious responsibility.

You must also find out whether a potential investor has someone else in mind to run your business. They may love everything about it except for the simple fact that you’re the person running it. They obviously won’t tell you they think you suck as a CEO, but an easy way to find out is to check out whether the other portfolio companies’ founders are still in the number one spot. Investors will remove founders from CEO positions. If you’re worried about losing your spot, realize it happens more often than you think. Just look at the musical chairs played out on the Twitter management team over the past few years.

Don’t get me wrong. As a venture capitalist, I had to remove one founder as CEO from one of the portfolio companies. I tried to avoid it, but the guy was an egotistical maniac. Overall, I prefer that the founder, if capable, remains chairman and CEO of their venture. But not every investor thinks like me. And some don’t give a shit either way.

Brain Candy: questions to consider and ponder