“Fast Money” versus “Dumb Money” versus “Smart Money”
There has been a FLOOD of new money coming into Silicon Valley especially since 2015.
I’d classify “Fast Money” as Hedge Funds, Private Equity Funds & big Mutual Funds. But my guess is that with this downturn alot of these guys will disappear (and yes its usually guys sadly). These folks in previous times were also called HOT Money, flooding in when the market got heated & flooding out (literally) when it starts to deflate. I saw alot of this with a front row view while living in Taiwan during the Asian Economic crisis in 1998. Ask the Thais, South Koreans, Malaysians, Indonesians what happened then. I also am not talking about Coatue or Tiger Global. But i would definitely include many of the east coast firms who came into tech the last 3 years.
I really should point out that this is nothing close to “Dumb Money”. “Fast Money” are super sophisticated folks who just operate on a much shorter timeline than Venture Capitalists due to the nature of their business and with their returns being measured in quarters, not years like in VC. They are very quick to write off perceived losses & move on to the next opportunity. This is a strength in their world but different in tech where massive companies are built over a 9–12 year period with lots of ups and probably more downs. Reputations are built in sticking with founders during hard times.
“Dumb Money” for me is definitely all the flock of Corporate Venture Capital funds (Not talking about GV or Capital G) but almost everyone else. Fundamentally, Corporate VC just does not work. VC is a 7+ year game and 99% of most corporates just don’t stick with it long enough to get good at it, nor are they structured well. I’d include as part of “Dumb Money” most of the non-tech Family Offices, folks who made $$ in other industries like Oil or Manufacturing and not willing to learn the rules (ie. arrogant) and thus get the table scraps of deals left over by the real Venture Capitalists. Many of these folks just don’t have the staying power to take the losses (or operate under unrealistic expectations) and learn how to do this tech investing well.
I really hate the term “Smart Money” & when a founder says it, its a clear sign they are an “out of towner” or arrogant idiot. Smart money means money that can help you with your business (ALOT) beyond just giving you cash. The reality is that it is a very small subset in the VC & Angel Community. No surprise these are usually the big brands like Benchmark, A16Z, Sequoia, Founders Fund, Emergence or the awesome folks at Floodgate, Felicis, True, Uncorked, First Round, Pear, Cowboy or Baseline in the earlier stage. (I’m clearly missing alot of folks here).
Investing in Tech (just like investing in equities or Bonds or Options) is an Art and Craft. It takes time, commitment and willingness to learn. As they say here in Silicon Valley, “There are two kinds of investors, those who are humble and those who are about to be humbled.”
If you want to read more, the very smart folks at Tribe Capital wrote about this back in April.
For Founders out there make sure you know who you are partnering with when you raise money. You won’t know who will have your back when things get bad but some understanding of which category they fit in will be useful in long run. This way you will not be too surprised when they eventually bail or turn on you.