For US venture capitalists, 'dumb money' is sometimes the source of early funding, enough to help demonstrate a concept, to position an entrepreneur for serious venture capital investments and relationships. The providers are not dumb; they have cash. But they are not established angel or venture insiders who will become involved in the company’s strategy and execution.
They make their money in other ways, but they want to participate in something with an upside; the transaction is often a loan, convertible to equity after valuations are established. Venture capitalists differentiate between good and bad dumb money; the good knows it is dumb and does not interfere. The same principles apply for dumb money that might co-invest at later stages.
The US government's stimulus package put its dumb money on steroids; making billions of dollars available. Some folks would be sceptical about a government’s capacity to manage a large investment portfolio or to appreciate the good versus bad dumb money distinction.
Pursuing policy rather than market-driven opportunities, clean tech companies sought and received big money from the government. Now, it is alleged, some were given special opportunities to make their pitch to people who matter, with access based on political fundraising or other connections.
Since the public’s money was disbursed as a loan (or loan guarantee), there were no equity upsides for the taxpayers. But, as it turns out, the downside potential was substantial; the first published bankruptcy will have cost the taxpayers more than $500m.
Was the due diligence inept or was good due diligence ignored? Apparently, some government staffers had doubts about the company that became the first bankruptcy from the stimulus package investments. The doubters were over-ruled (by someone).
Thirty years ago, another government (the UK’s in this case) funded the DeLorean Motor Company. It went bankrupt as well. Seems like governments bring a whole new meaning to the phrase 'dumb money'.
Daniel Malachuk works with business and government leaders on global direct investment strategies. He has advised many of the world's leading companies and served in the US public sector as director of White House operations.