I have seen too many CEOs’ efforts to grow their organization disrupted by under educated and inexperienced investors—sources of dumb capital, in other words. Your success depends on raising what I call smart capital—capital from experienced investors who bring more than mere money to the table.
Money itself is fungible. Any amount of it in any form is freely exchangeable with any other like amount. But capital is not fungible. Not every type and source of capital is created equal. Each carries with it specific relationships and effects that business owners must take into account.
Entrepreneurs tend to view capital as inseparable from the qualities of the investor, such as business acumen or strategic relationships with prospective customers. Meanwhile investors tend to define capital in terms of the opportunities it brings to protect their investments while helping their most promising ventures realize their full potential (READ: $20M in 18-24 months!!)
So how can capital be smart or dumb? The answer is in the verbs. Dumb capital does dumb things to entrepreneurs. Dumb capital…
- Requires you to give up too much control of your company too early in the process; it changes the dynamics of your company. With less power over decisions, you are less likely to reap the rewards of your sweat equity.
- Ties you to intrusive investors or board members. These individuals can be disruptive to your day-to-day operations, wasting more valuable resources than they bring.
- Disrupts your strategic vision by creating unnecessary friction, distraction, and bickering. Capital should support and enable your accelerated growth, not hinder it.
If you are considering a source of capital that has any of the following attributes, look up. See those red flags waving?
Smart capital is unique and highly differentiated by the value-add provided by the source of that capital. Entrepreneurs know they’ve found smart capital when the investor…
- Brings exponential business acumen.
- Has relevant past experience in building and scaling a similar portfolio company.
- Has access to broad strategic relationships, including prospective customers, partners, and members of the business and investor community.
Unlike dumb capital, smart capital waves green flags that recognizes you’re on your way in the accelerated growth curve.
With shrewd judgment you can attract the smart money and say no to the dumb. To successfully raise smart capital, I recommend that you focus on a strategic relationship plan based on the traditional three-step process of gap analysis. Describe your current state, define your future state, and seek out the business relationships that will help you close the gap between them.
- Present state: Gather your freshest and most accurate financial statements, market research, and details of your unique market position. Review your current strengths and weaknesses, in terms of operations and strategic plans.
- Future state: What is the realistic aspiration for your business within your funding horizon, say 18-24 months?
- Closing the Gap: The gap between your present state and future state becomes your scalability plan. How will you reach that goal? What infrastructure will you need? What talent, with what skills and capabilities? What relationships could help you control the speed and gradient of your growth?
Lean toward the smart capital, say no to the dumb capital, and if you find yourself saddled with investor relationships that are unproductive, get out as soon as you can. The investors you need bring much more than money—they bring strategic relationship capital.
1. Dumb capital requires you to give up control and/or accept disruptive and intrusive relationships.
2. Smart capital is generative. It brings business acumen, experience, and relationships.
3. Raise smart capital by focusing on strategic relationships developed around a sound scalability plan.
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