Three Types of Investors in Startups

Over the years through both my work with startups with Comunicano, as well as in my prior life in pro sports, I’ve seen all types of investors come and go. The good ones make things happen, while the bad ones get in the way. After thinking about it recently, I decided to lay out how I see investors today, especially when it comes to early stage startups who are looking for that first check and often get offered the wrong kind of money.

Smart, Dumb and Arrogant-Pick Your Investors Wisely

There are three types of investors who put money into early-stage companies which are looking for initial funding. One is good, and two are not so good for you. While few founders want to turn down money when it’s offered, taking money from the wrong type of investors is a recipe for long-term pain and disaster.

The three types of investors, smart, dumb, and arrogant, are about as different as the day is long. While all can come across as sincere, and appear to have your best interests at heart, picking the wrong ones, will leave you in a heap of hurt. 

Smart Money Investors

Smart money investors are smart for a reason. They know the market and how to use their resources best to make smart investments in early-stage companies. They understand the risks associated with such investments but also grasp the potential rewards that come with taking on those risks. Smart money investors also tend to have longer-term strategies and take more time to analyze each investment opportunity before making an investment decision.

 

Smart money investors are also experienced and knowledgeable investors, often professionals such as venture capitalists or angel investors. These investors are called “smart money” because they are thought to have a good understanding of the market and can make informed decisions about where to allocate their funds.

 

Dumb Money Investors

Dumb money, on the other hand, refers to investments made by individuals or organizations that don’t have the same level of knowledge or expertise as smart money investors. These investors may make decisions based on incomplete or inaccurate information and may not fully comprehend the risks involved in a particular investment. Often, these investors make decisions based on emotional appeal, gut-level reactions, or simply want to be in the deal without understanding the entire picture.

 

Dumb money investors are usually also often less experienced. They are generally only sometimes aware of a particular opportunity’s details. This leads them to make hasty decisions when investing in early-stage companies. As a result, they can easily become victims of misinformed investments, leading to poor outcomes.

 

Arrogant Money Investors

The last type of investor is the arrogant money investor. This type of investor believes they know best and won’t hesitate to make bold decisions, regardless of the risk involved. They often fail to understand the complexities associated with investing in early-stage companies and may be too confident in their ability to discern good investments from bad ones. As a result, they often take significant risks without adequately evaluating them first, leading to suboptimal outcomes or even catastrophic losses. They’re also often the type of investors needing the most attention, and often are the most pushy, often the type that tries to force founders into doing things their way.

 

Which One Wins?

Overall, smart money investors are the ones who come out ahead when it comes to investing in early-stage companies. Smart money investors are knowledgeable, informed and consider all of the risks before diving into any investment. They take their time to research the company, investigate potential partners, and analyze the current market before making any decisions. On the other hand, dumb money investors often find themselves in a challenging situation due to their lack of knowledge and experience. At the same time, arrogant money investors often take on risk without adequately assessing it beforehand, and often push or bully ‌founders to go in the wrong direction and, in turn, cause the business to make faulty decisions.

 

That’s why smart money is an essential resource when taking investment money in early-stage companies, because these investors have the education, experience, and understanding necessary to make smart investments that yield positive long-term results. Dumb money, or arrogant money, should be avoided at all costs, as they can lead to disastrous outcomes if not managed correctly.  

Having the right type of investor is critical for successful ventures in any business opportunity, but smart money is significant when it comes to early-stage companies. That’s why it’s wise to take the time to do your due diligence and research any potential investors before taking the money.  This way, you can make smart decisions that’ll pay off in the long run.

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