Startups need investors who bring not only cash to the table, but also their networks and business acumen.
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Ask any startup what the single most important element to success is and — more often than not — the answer will be money. Financing always ranks as a high priority for the small fish trying to make it happen in the big pond of business — but often discussed with less fanfare is where this cash comes from and what will come with it. These are actually the most important details to a startup.
That is not to say that money is not important. In fact, the second most common reason for startup failure is lack of funding, according to CB Insights. Although, perhaps ironically enough, the top reason for startup failure is lack of market need — a problem which could have been identified and avoided by investors who bring money with direction and money with experience.
Startups don’t just need money, they need smart money.
Startups need investors who bring not only cash to the table, but also their networks and business acumen. Essentially, they bring experience and direction to outfits that are usually inexperienced or directionless. So, let’s talk smart money and the startup.
What is smart money?
“Smart money” refers to investors who are simply more intuitive and aware of market movements and business health. The Financial Times describes “smart money” as “sophisticated investors who tend to pick the right moment to buy or sell assets because they can identify trends and opportunities before others do.” These investors calculate based on history and profit and invest accordingly. Where they go, other investors follow.
These business heavyweights are invaluable to a startup because they put more than simply their money where their mouth is; they also invest their expertise. A startup could have all the money in the world but it will fail more without the proper business direction and market placement.
Smart money works best for startups when nascent businesses pair with investors who provide a holistic approach to business. They can help in hiring the best talent, attracting interest from the most relevant stakeholders, securing a continuous presence in the press, avoiding pitfalls and, ultimately, fulfilling ambitions.
There are more than a few ways that money can be termed as smart. Perhaps the cash infusion also comes with experts in thought leadership and strategy, or executional capacity, or the ability to increase sales and raise funds. Whatever the method, smart money brings something more to the table than dollars. This becomes abundantly clear when conducting post-mortems of the startups which have failed.
Why do startups fail?
Startups fail all the time — and it is important to understand why. As mentioned above, the top reason startups fail is simply the lack of market need. Tackling problems that are interesting to solve rather than those that serve a market need is the most common issue startups cite for their downfall. The next most common reason for startup failure, as likely predicted, is money. Smart or not, money does need to flow into any startup to make it possible. Meanwhile, the third most common reason for startup collapse was team composition. More to the point: Startups need to comprise a diverse team with different skill sets.
These top three reasons for startup failure could be solved with the right management approach from the top down. Each of these reasons can be addressed with smart money. The right business and management structure will allow the right hires to be made and course to be charted. Smart investors can identify the right people for your team and help you to hire staff who will take the business to the next level.
While startups think money is the key, it is not the end-all and be-all for their potential success. They need skills and networks. Business and innovation expert Rosemarie Truman explained this misunderstanding best: “A common mistake entrepreneurs make in their struggle to find funding is focusing too much on getting the money under specific terms and not paying enough attention to who is providing the funds.”
Show me the (smart) money.
Savvy entrepreneurs recognize their businesses need more than cash to be successful — especially those at the top. Alibaba chief executive officer Jack Ma, who ranks as one of the richest people in the world, described the need for smart hires and smart staff as thus: “At first, I knew nothing about technology. I knew nothing about management. But, the thing is, you don’t have to know a lot of things. You have to find the people who are smarter than you are.”
Smart business owners want to work with investors who provide not just money but also their expertise, time and access to networks — and this is especially important for businesses looking to scale. The proof is in the research: Take for example a paper by Morten Sorensen, professor of finance at Copenhagen Business School, about venture capital and its impact on an overall business. Sorensen found that companies funded by more experienced venture capital funds were more likely to go public, and also that more experienced venture capital funds invest in better companies, leading to better long-term business health.
So, the question then becomes: Where does one access smart money? The answer will depend on whom is asked, but startups that have survived and later grown into viable businesses are a good place to start. The founders of collaborative blogging platform Niume, Daniel Gennaoui and Francesco Facca, have this advice for startups who are on the hunt for smart money: “First, you need a strong founding team with complementary skills that can actually deliver on their promises. Second, you need a working minimum viable product (MVP), showing that there is traction and interest for the product and people willing to use and pay for it,” the founders said. “The actual amount they invest is far less important than the value they bring to your company.”
It is also worth noting that crowdfunding can be considered a form of smart money, as it brings an ecosystem of partners who will help to scale and countless brand ambassadors who have invested their hard-earned cash.
It’s simply more than capital.
Gaining startup finance is not only venture capital or crowdfunding — it should also provide an ecosystem of business management and be viewed as such. It’s simply wrong to think funding is only funding. Startups can have all the money in the world but will fail more often than not without the proper business direction and market placement. Those who want to make a lasting impression in their given field need the guidance and support smart money brings.