What is “Smart Money”?

As builders and founders we often hear the advice to find Smart Money, rather than just money (or dumb money?? if there is such a thing.)

So working with the founder of another local startup we started to put together a list of what Smart Money really means to us.  Here’s the list, let us know what you think.  Note that this list is for Web/Mobile products and startups, not as fully applicable to other types of startups.  Each criteria gets it’s own weight based on your specific needs but perhaps this will help in getting some sense of a standard.

Generally smart:
– Experience in starting and building a web/mobile company in the last 10 years.
– Experience building and growing web apps or websites
– Have built or was deeply involved in building and growing native apps as part of their past/current business.
– Knows and can provide real-life advice on growth marketing and “the new customer acquisition” methods.
– Access to funding and recruiting leads.
– Access to prospective customers.
– Social media savvy.
– Has liquid funds to invest in your time frame.
– Expresses passion about the concept. (gets the vision quickly)
– Be experienced enough to help when things get rough, not jump the gun.
– Does not meddle daily in operations.
– Respects the leadership of the team.
– Experience in exiting companies.
Really smart:)
– experience in your specific vertical.
– B2B and/or B2C experience – depending on your model.
– Has access to c-level executives in customer orgs.
– Has deep and active network in your network.
Of course as they say all money is good.  BUT, is it really?  Have you ever experience being married to the wrong investor?  Bottom line, it’s better to not work people you don’t really feel excited about than to take anyone’s money, specially as first time founders.  If you have past experience in funding and building new enterprises from the ground up you will know how to handle even “just money” investors properly.  Until then make sure you find the right investor for your new venture.

How do the Founders fair in Angel & VC-backed companies

Interesting article in TechCrunch http://tcrn.ch/cYXT6l about Ron Conway, the famous Silicon Valley angel investor’s discussion on the success rate of investor backed companies.

Some of the stats he used (apply to his own fund SV Angel):

– He expected about one-third of companies fail, one-third get investors their money back, and one-third bring a 2x to Google-x return,

– Actual numbers showed failure rate in recent years — since 2002 — was about 40 percent,

– This leaves 60% of investments that bring either a break even or nice return to the VCs.  Of this number only 20-30% would return a 2x or more return, meaning 70-80% are basically losers.

Some good points in the comments:

– 90% of founders of venture backed companies end up getting “nothing”.

– Founder success is the true measure of a success — not whether an Angel can recoup losses.

–  90% of founders get $0-$200K from of their options (which given their lower salaries during the startup’s life is effectively negative).

– Most of the money from an M&A/IPO goes to the VC’s. The liquidation preferences take most of the value. Sometimes you’ll see the management get some type of carveout, but there’s rarely anything for the original founders (if they’re no longer in the company) or regular employees.

I believe the value of founders in the equation is lower than it could be.  2nd time founders usually have a much higher ratio of success (2/3) – partly because many of the first time losers never start another company.

So short of starting a company, having it funded and exit with a 2X plus return what are founders to do?

Educate ourselves – learn as much as possible before getting funding and fully understand and question the term sheet details; maximize your chances of success by taking a few important correct steps upfront.