CryptocurrencyInvestingBanksReal Estate

How to know if you’re dumb money

November 18, 2010, 8:39 PM UTC

By Bryce Roberts, contributor

There’s a term re-entering the venture lexicon over the last few months that I haven’t heard in several years: Dumb Money.

It surfaced again in an article I read today from The Observer. It’s a great piece in which a number of investors are quoted, but the one that stuck out to me was Roger Ehrenberg, who tried to give some context for the term dumb money and the impact of it in this current frothy market:

Part of the reason for this (frothiness), said Mr. Ehrenberg, is the large amount of “dumb money” being thrown at entrepreneurs by inexperienced angel investors who have jumped into the tech sector because it is fashionable to do so. “Often these people invest without any apparent strategy in mind, putting small amounts of capital into a wide range of early-stage companies. They are trying to sprinkle the money around and get into every good deal and just kind of have a piece of the action. And that’s a little bit more of a casino type of model, and I think that’s problematic.

Throughout the article Roger weaves a thoughtful series of tell tale signs for someone who would qualify as dumb money. As I read it, I couldn’t help but think of Jeff Foxworthy’s series of “you might be a redneck” jokes. So, in that spirit, I wanted to put forward a few “you might be dumb money” observations that I’ve picked up over the years:

  • if you make more investments in a month than there are days in said month, you might be dumb money.
  • if you “happen to be in the neighborhood” of a hot company several times a week, you might be dumb money.
  • if your idea of due diligence is a Google search, you might be dumb money.
  • if you believe an entrepreneur when they tell you they have no competition, you might be dumb money.
  • if you can’t remember the names of the entrepreneurs you’ve funded, you might be dumb money.
  • if you can’t describe the business of a company you’ve funded, you might be dumb money.
  • if you take everything Paul Graham says about angel investing as gospel, you might be dumb money.
  • if you stop answering calls when things get rough, you might be dumb money.
  • if your idea of “adding value” is that your check clears, you might be dumb money.
  • if you start negotiating terms in the first half an hour of the first pitch meeting, you might be dumb money.
  • if you fight to make sure your name is mentioned in a company’s funding announcement on Techcrunch, you might be dumb money.
  • if you need a roller bag to carry all the versions of termsheets you’re prepared to offer to a negotiation, you might be dumb money.
  • if you put more weight in “social proof” than actual proof, you might be dumb money.

I’m sure y’all could come up with much better signs of dumb money than these, so please leave yours in the comments.

On a more serious note — if you’re in the market for raising money, know the difference between dumb money and investors with a long term commitment to building great companies in good times as well as bad. Choosing the right partners with the right alignment around the kind of company you want to build will be one of the most important decisions you’ll make and can play a major role in your long term success.

Bryce Roberts is a co-founding partner of O’Reilly AlphaTech Ventures. This post originally appeared at his blog.