3 Ways to detect dumb money

Dumb money is an investment that does not make a return. In business and in finance the dumb money is one of the biggest issue why investors lose their investments. When companies look for investors to invest in their company, then investors trust these investments but in the end the company fails and as well as the investments are lost. In corporate finance there is Venture Capital companies that invest in businesses, VCs can help entrepreneurs with great idea to make their dreams to come true. VCs also needs investors to invest in their Venture Capital company, if the normal investor invest in VC company then they might also invest an investment that does not make return. There are other factors when the company has too much money that they invest in wrong investment therefore it reduces the value of the company and these also one of the types of dumb money. There are 3 ways you can detect dumb money. 

Demand for transparency

Best ways to demand for transparency is by asking questions before you make your investments. The important questions are:

• What am I investing in?
• How is the company going to make return?
• How much return will I get?
• When will I get my return? 
• Can we have a say in it?

Some times the Venture Capital companies invest in the new businesses and when it is time to sell the company or to list it in Financial Market with IPO then the entrepreneurs do not come to an agreement therefore they close down the company. When these two parties do not come to an agreement then most of the time the investors are forgotten. If the business that VC invested fails then the investors lose their money. 

Detection of dumb investment by Venture Capitalists

There are great entrepreneurs that knows how to build and fund the businesses, these entrepreneurs can convince the investment companies to invest in almost anything. The Venture Capital companies usually detect bad investment but even for them it is hard sometimes. One of the tactics used by entrepreneurs is that they wait for more than half a year before they start blowing the money. Waiting builds trust from VCs and then they get the 2nd payment from VC companies, usually it take long before entrepreneurs get the money. Venture Capitalist can usually detect this when the entrepreneurs present their proposal and during the interview by also asking the right questions. The VCs also wait before their invest in the business ideas of entrepreneurs until they see the response of other Venture Capitalist. 

Dumb money in established companies

In corporate finance there is one of the complex issue but I will try to make it as simple as possible to explain it. The investors and shareholders do not want the company to have too much money  which is called free cash but some call it dumb money. When established companies have too much extra money then they want to make investments which could be a bad investments. These usually can be detected by knowing the type of business and also the type of CEO or managers. The CEO with high ambitions are usually not favorable by the investors because they make too many investments that could lead to failure which will heart the value of the company. Always know the CEO of the company you want to invest. 

Conclusion

The person who holds the money has the power, it is the most important thing every investors should know. As soon as you let that money go then you transfer the power to other party. It is best to invest in investment that you know it will make a return in as short period of time as possible. The economy is always uncertain therefore sooner you make your return the better it is for you.