Advisors will tell you to look for smart money. This post will not. Instead it will do the opposite. It will tell you to stop looking for smart money. It will disturb what you know. It will mess up your vocabulary. But in the end it gives you a new perspective on investors. Perspective is power. Use it.
I used to be smart. When startups asked for smart money, I felt they were looking for me. Then something happened to me. I turned Dumb. This is the story of how it happened.
It all began in front of a stage
I was in a big white room with a beautiful ceiling. I was facing a stage. I took notes. I was a judge in a pitch competition. I felt at home. I was flanked by other smart people. Maybe except for the accountant on my right.
The pitches were good. The founders had practiced. They wanted to change the world. They looked for “smart money”. All founders do. It makes sense. Nobody wants stupid investors. I could sympathize. I remembered why. The memories and feelings came back. It was almost 10 years ago….
I started feeling smart
I was graduating business school. Jobs were plenty. I didn’t want one. Instead, I co-founded my first tech startup. We pitched to investors. They all seemed dumb. They just didn’t get it. I knew because they didn’t invest. Then one day we got lucky.
We met smart people. They asked the right questions. They were smart. I knew because they invested.
After my first startup I did another one. We sold it. I felt smarter than ever. Then Accelerace called me. They wanted me to join as an Investment Manager. I said yes. They could use a smart guy I thought.
My job is to spot startups, mentor them and invest in them. Pitch competitions seemed like a good place to be. So I went. And went. And went. Until the day I found myself in the big white room with the beautiful ceiling. I had grown smarter for so long now. Little did I know that it was about to change.
The question that changed everything
The next day I met with one of the pitching startups. I felt I should. They seemed like me in 2006. They repeated they were looking for smart money. Then it happened. My descent to stupidity began.
I don’t know why. But I asked an odd question.
I asked: what do you mean with “smart” money?
They looked puzzled. It was a strange question. They said: You know… smart investors.
I was silent. It was awkward.
Do you mean someone with a high IQ? I asked, knowing that it was a silly question.
They laughed. Of course not, they said. Good, I was thinking. I knew that Lewis Terman had proved long ago that high IQ and success is not related.
They clarified: We want someone who provide more than just money. We want someone who can help us.
So you mean, active investors? I asked. I was surprised to hear myself probe deeper.
I guess, the CEO said. But it must be someone who knows what they are talking about.
So you mean, investors with domain expertise? I asked. They started getting a little annoyed.
Well not necessarily, they said. Someone who has been successful themselves!
Do you mean someone who has made a lot of money? I asked.
Yes, they said. But we don’t want a guy that made money being lucky. We want someone smart!
By then, they thought they had settled the question. They hadn’t. Instead they left me shell-shocked.
I couldn’t sleep that night. The meeting was replaying in my head. What bothered me was this: If we use the term “smart money”. Then shouldn’t we know what it means? Why couldn’t they define what they meant? Could they have used the term without themselves knowing what they meant. Do we all do this?
Also, if smart money exists, then dumb money exists too. Who are the dumb money?
Oh right, investors who aren’t active. Wait, they would be inactive investors. Not really dumb.
Oh yes, the non-experts. No wait, the opposite would be generalists.
Right! Got it! People who made money, and had NOT been lucky.
The last phrase just didn’t seem right. I couldn’t even lie down anymore. I had to go for a walk.
The problem was this: Everyone I know who made money, have also been lucky.
I have a friend. He co-founded a startup in 1998. His co-founder could code. My friend could sell. It was a match made in heaven. They worked hard and made wise decisions.
They did everything with “The Internet”. Everyone wanted it. The Internet. So they took the company public. The stocks soared. The co-founder wanted a house. Or maybe his wife did. So he sold his stocks. He made tens of millions. My friend didn’t need a house. He was single. He could wait. So he did. He never made a dime.
The difference. Pure luck. Or the absence of it. Today people think of the co-founder as brilliant. Who wouldn’t. The guy IPO’ed and drives a Ferrari. My friend. Well no one really knows him.
I walked around. I was recalling stories of successful people. Each story had moments of extraordinary luck.
Like the time IBM wanted to buy an operating system. IBM scheduled a meeting with the CEO of a software company in Seattle. The CEO didn’t show up. Instead, the IBM people went to see young Bill Gates. They had time to kill. They didn’t intend to buy anything from Bill. But they did. They called it MS DOS and that luck defined Microsoft.
Or the time a young Dane named Morten Lund helped his friends. Morten handed them 50K to support their “project”. That project turned out to be Skype.
My head was clearing up. I was certain now. There is no such thing as smart money. Everyone who makes money is (also) lucky. And then it dawned on me. Like a lightning. I stopped walking.
I am dumb, I whispered. I am a dumb investor, I said, now a little louder. I am dumb! Stupid! a Moron!
Scientists would have shouted: EUREKA! My words were less elegant.
I turned even dumber
You would have thought that was the end of it. But it didn’t stop there. The more I looked the more stupidity I saw.
It is estimated that 99% of all mutual fund managers don’t beat the market over time. The number who do outperform the market is indistinguishable from luck. Like people who win jackpot multiple times.
It turns out that most millionaires simply did business in times of extraordinary economic activity. The year of birth is very deterministic for your wealth. Not exactly absence of luck.
So why did I write this post? I have a proposal. I think we should stop using the term Smart Money. I don’t think it exists. Reality is just too complex to plan success.
My advice to founders raising funding. Try to be specific. Say, that you want active investors. Or investors with entrepreneurial background. Or investors with specific expertise. Or investors who like you.
If founders look for smart investors, I’m afraid they find none. They only find people who think they are smart. Like me some years ago. And I turned out to be dumb. Strangely, I feel smarter now knowing this.
- Everyone who ever made money have been lucky
- We (as an industry) need to stop use the phrase “smart money” and be specific instead