Smart Money: Investors That Bring More than Cash to the Table

February 2004 Corporate, Energy & Utilities

Securing initial investments for a new venture is an early hurdle for entrepreneurs. While most executives are delighted to receive a cash injection from any legitimate investor, a few executives have the privilege of receiving more than cash for equity. For them, the investor will bring not just money, but Smart Money.

When I first heard the term “Smart Money” used to distinguish venture capitalist, I chuckled incredulously at the terminology. Was this a term some in the venture capital community had coined in order to brand themselves and demand more favorable terms when making an equity investment? Perhaps some abuse it that way, but for others the moniker “Smart Money” designates real value for entrepreneurs.

Smart Money refers to an investor bringing more than money to the table, including a network of potential customers, strategic alliances, and potentially services and tools. Some investors have these connections and resources, others just have the cash.

Jeff Coney, Director of New Business Initiatives at the Northwestern University ITEC, provided a glimpse of the means by which outside sources can bring benefit to a new venture. In May of 2003, he stated that when he takes a new company into the Northwestern ITEC fold, he takes joy in opening his rolodex and providing introductions to potential customers. While ITEC is not a venture capital fund, a partnership with this outside source clearly aides in gaining early market traction and clarifying the value proposition.

Mr. Coney’s support is laudable, but it pails in comparison to that which can be provided by an industrial conglomerate. Investments from privately held industrial conglomerates such as The Marmon Group Inc. or Hunt Power L.P. can go far beyond cash and introductions to include customers, infrastructure, and branding.

For example, consider MeterSmart. According to Dan Price, President of MeterSmart, the company was born out of a project with Sharyland Utilities in South Texas, a Hunt Power affiliate. In conducting this project, executives at Hunt Power discovered the value proposition and uncovered the market potential for advanced AMR (automatic meter reading). To capture this opportunity, Hunt Power LP invested.

Hunt Power’s support for MeterSmart didn’t stop at handing them an initial investment; it extended to include their first customer and more. When MeterSmart required an accounting system, Hunt Power provided them with SAP which is far out of reach for most new businesses but only a small contract extension for Hunt Power. And, when MeterSmart addresses a new utility customer doubtful of the financial solvency of all new ventures, MeterSmart can refer to the brand reputation of Hunt Power as a testimony to their integrity and staying power.

Clearly, Hunt Power provided MeterSmart with far more than cash infusion for an equity stake. They, and other investors like them, provide “Smart Money” in the form of valuable benefits of initial customers, strategic relationships, infrastructure, services, and reputation. Perhaps entrepreneurs seeking investors should look for more than just cash sources and develop sources of “Smart Money”.

About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

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