Whether you are a seasoned, serial entrepreneur or a first-timer, there is always someone who knows more than you or has been where you’re trying to go. From deep expertise in your target market to experience in scaling your tech business, advisors provide you with a powerful tool to bring skills and experience into your business that you and your co-founders may lack. For early stage companies without resources to hire this sort of talent, advisors are doubly beneficial in that they do not (typically) cost anything in terms of cash. This idea is neither original nor new.
A recent study of over 650 web startups called the Startup Genome Project quantified the characteristics that separate successful new ventures from those that struggle. The study found that the number one factor is the startup entrepreneur’s drive and ability to learn as demonstrated by their use of mentors and startup thought leaders. Specifically, startups that have helpful mentors raise seven times more money than those that do not. Further, startups that follow startup thought leaders are 80 percent more likely to raise money. There is some debate whether or not this is a causal relationship. Do startups with strong mentors do better, or do successful entrepreneurs do a better job of attracting and using strong mentors? Another study on the traits of successful entrepreneurs (there are hundreds of these) found that, “the only trait that is reliably there through all sorts of successful founders is the ability to network. Successful founders can understand their weaknesses and fill those gaps with people from their network.”
It is less obvious, however, where entrepreneurs can find high-value mentors and what they should do to extract the most value from these relationships. There is also some disagreement on whether individual advisors or formal advisory boards are the way to go. Finally, nearly all first-time founders wonder how much compensation, if any, should be given to an advisor in exchange for their time, expertise, and connections. I have helped several startups design and seat their first advisory boards and will attempt to answer many of these questions below. I also include a cautionary note about so-called “VC/fundraising” advisors.
Benefits of Building an Advisory Board
Advisors come in many shapes and sizes. Some are useful for one-off projects like market research or making introductions to strategic partners or investors. Others are true mentors and provide value across multiple areas of your business through progressive stages. Several startup thought leaders feel that the value of formal advisory boards are over-hyped and often misused. Brad Feld suggests, “If you go through the trouble of creating one, make sure they are really champions for your company and will be there to answer your calls. Sometimes the more of a luminary the advisor is, the less likely that they’ll have time to really impact your business.” However, Mr. Feld believes that advisory boards don’t help attract investment and can be a waste of time. Mark Suster has similar skepticism, “In my experience most advisory boards under deliver relative to expectations. The CEO picks prominent people who are busy in their own right with their own companies.” He goes on to list four reasons why advisory boards under deliver: advisors never have enough time, they don’t deliver enough wisdom, they require too much effort from the founder to manage, and they can be expensive.
I agree that advisors must be more than a known name on your slide deck. This strategy signals inexperience and naiveté on the part of the founders and almost never delivers value to the business (certainly not when equity or cash compensation is given to a token advisor). However, I believe strongly that a highly engaged advisor can be an invaluable asset to a founder, especially if this is their first venture. Further, while individual advisors (where a founder calls with specific questions from time to time) can be valuable, I think advisory boards can be more effective in guiding first-time entrepreneurs. Here are the benefits of an advisory board (explained in greater detail here):
- Strategic Thinking: Good advisors are able to look a few miles further toward the horizon so you can focus on execution. This doesn’t absolve you from responsibility of thinking strategically, but it helps to have added horsepower in this area.
- Industry Experience: Most founders have lots of product experience but lack knowledge their customers and markets. It’s one thing to have a compelling value proposition, but it’s another challenge altogether to understand how, when, and from whom your customers want to buy.
- Access: Experienced mentors come with deep contacts (we used to call these “rolodexes”) with strategic partners, potential customers, and investors.
- Mentoring: It’s not just about developing your idea into a successful business, but equally about developing you into a strong leader. Advisors are often just as interested in helping you develop as they are in helping your company.
- Preparation: If you plan to attract outside investment from professional sources (and hope to keep your job as the CEO), you will eventually be required to form a board of directors. A well-managed advisory board will make you more accustomed to engaging with, and leveraging, a group of outside stakeholders. This is why I feel a board approach is more effective than individual advisors.
- Credibility: I list this last per my previous comments on token advisors. However, if you can convince a “player” in your industry or similarly impressive person to put real time into your business, it certainly doesn’t hurt your chances with investors and customers.
How to Build an Advisory Board and Tools That Can Help
The first step is to know what you’re looking for. Founders should start with the strategic priorities of the business and overlay these against their current strengths and weaknesses. Generally, they fall into one or more of the following categories:
- Deep sales, operations, or technical experience in related markets
- Previous leadership experience at a company that grew from startup to a sustainable business
- Equity investment fundraising experience
For a more comprehensive review on how to build an effective advisory board, read this brief online primer. One thing that all advisors need to have in common is availability. In order for an advisor to really impact your business, they need to have time to discuss ad hoc issues and participate in regular group meetings. I think this requires four to six hours per month, which is not a trivial amount of their (or your) time. The best way to determine if a prospective advisor has the bandwidth to impact your business is to call other companies that he/she is actively advising. Ask whether or not their phone calls are returned promptly, if the advisor attends regular meetings and whether or not they’ve provided value-added support.
How Advisors are Compensated
In many cases, the answer is “nothing.” If an entrepreneur or his/her idea is in the least bit interesting, there are likely lots of smart people that are willing to spend some time with you and provide free advice. Likewise, if you have investors already, they are hopefully providing strategic value at no additional cost. But if you’re asking for real time over a sustained period and for true engagement (help with recruiting, introductions to customers, work on your business plan), you need to compensate them for their time. Advisors are just like investors, except they are investing their time, credibility, and energy into your business. That is why they are often given equity in exchange for their participation. So, how much equity? It depends. Typical ranges are between 0.25 and 1 percent. But I’ve seen numbers as high as 10 percent (which is almost never worth it). In all cases, it’s a question of value. How much time and value is the advisor going to put into your business? The Founder Institute recently pulled together a great framework for setting the terms of an advisor relationship. The important thing is that you set expectations of what the advisor will contribute to the business in terms of time, access to contacts, and actual work. Further, you should always include vesting and allow either party to terminate the relationship if things aren’t working out.
Common Pitfalls
Many of the most common pitfalls have already been covered: token advisors or not setting expectations appropriately. Just as dangerous is the tendency of founders to ask for feedback or advice without taking action or providing the progress updates. Advisors want to know that they are adding value and that you are taking action against their advice. If they wanted to spout information into the ether, they’d be writing crappy blogs like this one.
One alarming trend that I’ve seen is the so-called “VC broker.” These are advisors who claim to have contacts and connections with VC or other investors and are willing to broker introductions for an equity stake, a cash fee, or even both. A small retainer to someone who helps build your financial model or assists you through the process of applying to funding sources (like a grant writer) is one thing. Taking cash out of your business for making introductions and phone calls is something totally different. VC investors generally look down on this behavior for two reasons. As Brad Feld puts it, “Most venture firms don’t like the idea of brokers being involved and most venture financing documents have a clause that the company warrants that there are no brokers involved. Remember, the company’s money that is paying the broker is, in fact, the VC’s money that they invest in you.” Further, “Good VCs have plenty of proprietary deal flow, so they aren’t relying on brokers to show them deals.Therefore, many brokers are only going to have access to funds that are deal flow deficient.” In other words, VCs don’t like their money going toward “finders’ fees” and only the weak investors need help accessing deals. Anyone claiming to understand the VC fundraising process should already know this. At best, using a broker will signal to a good investor that you don’t know what you’re doing. Worse, you’ll have to negotiate those fees away for the VC to do the deal.
Unfortunately, many first-time entrepreneurs find the process of seeking investment confusing and scary because, well, it is. The negotiation and closing process is indeed complex. There are lots of good advisors that can help you through this process. They’re called lawyers. While you have to pay for their services, an attorney experienced in venture financing will help you navigate these waters. In any case, if you feel that you need help accessing potential investors and have an advisor in mind that claims they can help, Feld suggests this: “The first thing you should do is ask them for a comprehensive list of all of the people and contact information with whom they have done work for in the previous two years.You should then systematically contact each of these people and find out how things went. In most cases, the mere act of doing this will flush out all of the nonsense.” Also ask yourself this question: If an advisor is willing to call in their contacts and promote your business for investment, why aren’t they investing in your company?
Robert Hatta is the Vice President of Entrepreneurial Talent for JumpStart. He has worked at several startup companies in Northeast Ohio and Silicon Valley, as well as other high growth, technology companies across the U.S. and Europe. Through these experiences, Robert has gained an extensive understanding of the culture and needs of high growth companies with a particular focus on talent.