Commodity Money Vs Smart Money

One of the things that an early stage fund investing at Seed or Series A should be is commodity money.  By commodity money I mean just throwing some dollars into the deal and hoping.  You should bring something to the table.

What’s “something to the table” mean?

It means that you have a network of something the company can tap into.  Maybe it’s tech talent.  Maybe it is sales talent.  It might be that you have connections to potential customers in the segment they are targeting.  It might also mean that you have scaled a startup company before and you can mentor the team on how to manage at various stages.  Maybe you have deep expertise in the segment they are targeting.  This often is key when investing in medical device companies.  Maybe it’s marketing experience and the ability to figure out how to get customers at a low acquisition cost.

There are lots of ways to bring something to the table but you have to find your true edge.

Smart money also finds a way to manufacture some asymmetric information.  If you know more than the market, then the market isn’t efficient.  This is why a lot of venture capital people absolutely love it when people look at their early stage portfolio and think they are taking dumb shots on stupid companies.  It means if they have done their homework they have a vision and more information than the market.  That’s where the blow out investments are made.  Being contrarian.

If you can’t find a way to create an edge for yourself, it’s likely that you are too late to the party.  You might also be way too early.  Being too early is a harder thing to tell than being too late.

Too often, investors and funds just coattail and go for the ride.  I saw that happen a lot in the trading pit too.  People that skitched on the rear bumper of the big traders often got run over.  They were so big and carried inventory so you didn’t know if they were getting in or out.