Money can be different; it can be “smart” and “not so smart”. When seeding or growing a start-up, it’s critical to attract the “right” investors with “smart” money.  While this may fly in the face of conventional wisdom – embrace any investors willing to bet on your business model – entrepreneurs must really pause and consider if they are making an equally shrewd bet on the investor, too.

One of the cases in my personal business carer: a prominent but conventional investor was introduced to me at a certain point about investing in Parallels, a profitable software company that we founded in 2000; his businesses bringing in steady cash flow, this big shot was hunting around for new opportunities. While due to the internal re-structuring we somewhat urgently needed to find a buyer for some small % of Parallels stock, working with this guy was doomed from the get go.  Why? He truly didn’t understand the software business model. “Let’s compare your business with a hotel,” he proposed. “How can you ask for 20x EBITDA valuation, when I could only get 5x EBITDA for my investment in a hotel?” Although it seemed rather obvious – hotels have lower margins, higher fixed costs, limited scalability with any expansion requiring high capital costs – the software model just wasn’t an intuitive recipe for his investment cook book.  His flawed comparison set off alarm bells.  Ultimately, we couldn’t reach an agreement, as I realized that while this person could bring money to the company, I would have had to constantly explain and spoon-feed every aspect of the business to him, whenever there would be a change, which is in the fast growth business is actually almost constantly, and so the trade-offs were not worth the effort.

To read the original article: Why The Source Of Venture Capital Is As Important As The Money Itself | TechCrunch