When it comes to investment, all money isn’t the same. Who’s behind that money matters a lot. Founders like the three we talk about here have found that investment falls into three categories:
###Smart Money
This is when the investor has useful insights and connections for your business. It’s generally the best kind of investment if you can get it. Still, sometimes you might not want intereference from an investor so keep this in mind.
###Dumb Money
Don’t let the name fool you, dumb money isn’t necessarily bad. It just means that the money doesn’t come with an investor who wants to be involved in your business. It’s money and nothing else.
###Bad Money
Bad money happens when investors start trying to run your business, when their interference isn’t helpful. This can happen for a variety of reasons but when it does it can be poisonous, hurting your business and deterring future investors.
##Turning Bad Money Into Smart Money
The team running ihub in Nairobi saw turning potential bad money into smart money as a core mission. If they were going to develop a startup ecosystem there, smart money was needed.
“A lot of investors coming from outside of Kenya interested in Kenyan startups. What has happened over the last couple of years is that we have local funders who are beginning to step up to the plate and pay more attention to this ecosystem.”
-Nekesa Were, Operations at ihub
To do this they took on a role of matching the right investors with the right founders; using their expertise to turn what could be bad money into smart money.
##Using Dumb Money to Get Smart Money
For Matt Wainwright at Standard Microgrid, the challenge was to tell the difference between bad and dumb money. His plan was to find grants, and use that money to build a proof of concept so when he goes to investors he’ll be in a good position to find the right smart money investor for him.
“When we looked at the grant money we realized by using grant money to do a proof of concept, and hopefully a proof of scale, we now are proving the business and establishing a track record, and adding value to our business, which means we can defer the need to take on equity to much later in our growth plan.”
-Matt Wainwright, Co-Founder of Standard Microgrid
The challenge was knowing that grants aren’t always dumb money, they can be bad too. In those cases, they can redirect your money and resources away from your priorities and derail your business.
##Bad Money Can Sneak up on You
Werner Swart, Founder of Drylo Bag had his own problem. His investors were a wealthy group of Canadian doctors. They seemed to be dumb money. But when he needed more money for his company to build a manufacturing facility, the investors said no. He ultimately brought in more investors and convinced the previous ones to invest more, but the time needed to convince them was wasteful.
“I said the next step is another round of fundraising to make a manufacturing facility… I went back to my original shareholders, put everything on the table and they didn’t want to let the shares go so they put up the money.”
-Werner Swart, Founder of Drylo Bag
This was an example of what seemed like dumb money turning into bad money. He thought his investors had the right aims for his business, but this situation showed him he was wrong and just how damaging bad money can be. Still, he managed the situation well and came out in a good position.
##Avoiding Bad Money
Ultimately, one person’s bad money is another person’s smart money. Investors aren’t inherently bad or smart, it’s about making the right connection. Finding the smart money meant getting to know the investors, talking with other companies they’ve invested in, working hard to make sure your interests align.
“The most powerful thing ever said to them was “No, we don’t need your money.” And they were kind of taken aback, and then they were even more interested, because now they’re like “Jeez, if they don’t want the money, this thing must be really good.” It was kind of a weird dynamic.”
-Matt Wainwright, Co-Founder of Standard Microgrid