February 06, 2004
BBBT: Money => Stupidity
Posted by Gordon Smith

One of the most entertaining parts of Barry's book is the section titles. I particularly enjoyed this one: "Their money can make you stupid." As you might guess, this talks about people spending other people's money in very silly ways. The late 1990s are a giant case study for this proposition.

In my course on Law & Entrepreneurship, we cover venture capital and franchising (among other things). I love placing these two forms of business financing side-by-side because they are so different. Consider this point of difference: very good venture investors have portfolios with a small number of firms, something in the low double digits. By contrast, very good franchisors have hundreds or thousands of franchisees. The easiest explanation for the difference is that each venture-backed firm is trying to be unique, whereas each franchisee firm is trying to be the same. Uniqueness requires more time. But here is another point of comparison: venture-backed companies are spending the VC's money, while franchised firms are financed by the franchisee. The take-home lesson: if you are spending your own money, you don't need to be monitored as closely. Worth remembering.

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