Thoughts on Advisory Capital - The bridge between VC’s and Advisory Boards

Last week, Stowe Boyd wrote an an article on the concept of “Advisory Capital”.

In summary he calls it a “fusion of the best of both the venture capital and advisory board models”.

I have a different take. I call it “the bridge between venture capital and advisory boards”.

For the rest of this entry I will refer to Advisory Capitalists as “AC” or “AC’s”.

Here are the criteria with my take on each concept

1. Like venture capital, advisory capital is about the investment of a critical resource into a startup. It’s not money, however, but the experience, expertise, social capital, and public authority that advisory capitalists invest.
   Steve’s Take: The advisory capitalist (AC) must differentiate themselves from a VC and a typical advisor. They are the bridge between them and should bring investment relationships to help the company move to the stage where they will receive investment and the AC is the catalyst and for that to occur.
2. The leverage from advisory capital comes from consistent involvement over strategic scope of time: months and years of frequent interaction. Weekly calls, monthly meetings, quarterly planning sessions. A constant focus on bringing strategic goals into realization.
   Steve’s Take: This is similar to what an advisor would do. I would argue that this should include integration into milestone delivery and possible inclusion in meeting with VC’s.
3. Advisory boards in principle are a way to involve well-known authorities or business celebrities into the mix of the business, but in practice they have become a PR exercise with flabby results, in general. The minimal levels of involvement — an occasional call, an annual dinner — do not lead to great results, because there is not a deep enough investment being made.
   Steve’s Take: Almost totally agree. The previous bullet should clarify the roles of those with an AC role and those with an advisor role. Some advisors are not looking to be AC’s and their compensation should reflect it. However, there should be some accountability and if they can’t deliver, get rid of them. You wouldn’t keep an employee that doesn’t deliver. Why would you keep an advisor? When due diligence time comes and the VC calls these people and they hear things like “haven’t talked to them in a year” or “met with them once but they never told me what they needed from me”, it will come to back to bite you.
4. I believe that someone who will be an effective advisory capitalist will view that role as their primary professional purpose. Just like the best venture capitalists are not doing something else on the side, those moving into this new frontier will not be part-timing it.
   Steve’s Take: I don’t agree completely with this one. If they are doing various projects and their expertise and time commitment is there, this doesn’t have to be a full time thing. It would be great to find a full time AC, but then again, is that someone’s goal? I think firms like this will emerge and have incubators and state economic development dept’s as clients.
5. In order for the AC model to work, other elements of the VC model have to fall into place. The AC has to avoid conflict of interest — if she is affiliated with one company building a product to do X, she cannot do the same with a second company. But this also means that the return on involvement (ROI) for the AC has be be more like a VC than a consultant. For a strategic level of involvement there must be a non-trivial return on involvement.
   Steve’s Take: This is one that I think will be the hardest to change. Mainly because of ROI and the culture of the business world. Currently, advisors help companies that compete, but are under NDA and respect the boundaries and hedge their bets. AC’s that have a particular focus (i.e., marketing, finance, Web 2.0, social networking, bioinformatics) will want to have multiple companies that compete but also have a diverse portfolio to create their own ecosystem. This is what a VC firm would like to achieve but rarely does. They are so focused on large returns that despite making that portfolio connection where it would be of benefit, it doesn’t. The AC would be motivated to do it and this could help change the culture. Slowly at first, but it could happen.
6. The historical levels of stock participation for the passive, PRish, list-of-names sort of advisory board membership are inadequate for the degree of involvement contemplated. ACs will have to prove their worth, but my feeling is they will prove to be something on the order of 10 times more effective that the Madame Tussaud wax dummies that most companies populate their advisory boards with. And a company will only need a handful of ACs, rather than a boatload of in-name-only advisory board members.
   Steve’s Take: I totally agree with this one. However, this needs to link with Point #2 and compensation should increase with time and be performance based.
7. Advisory board stock participation is often as much as 0.25% to 0.5% ownership in a startup, subject to normal vesting periods of 4 or 5 years. I believe we will see this boosted 5X, 10X, or more, to attract and retain powerful ACs.
   Steve’s Take: See my comments on Point #6.
8. Unlike VCs, ACs are not amassing cash from passive investors, and managing it for them. ACs do not have a pool of cash to draw a salary from. (Or at least many of us don’t.) As a result, they will seem like a consultant on some level, since they will charge for their time and expenses. However, at least in my case, I am discounting from my a la carte, short-term consulting rates when moving into an advisory capital situation: when the client is interested in a long-term, high involvement relationship, involving a serious stock share (1% ownership or more).
   Steve’s Take: I think the discounting comment is a valuable point. There is an exchange of value from both parties and the AC is going to provide tremendous upside over the long term. Understandably, the AC does need to eat and support their family so there must be something given from the entrepreneur. People don’t work only on sweat equity. Let me rephrase that one. People other than the founders don’t work only on sweat equity. The upside and stock retention by the founders is why they are doing this. The AC is an important component but not the only component. This will also help the AC gauge whether the entrepreneur will value the time. Because when you pay for something, you value it more.

My bottom line thought: Put an advisory capital group together with various disciplines that can be matched with the the company. This accomplishes two things - provides them an advisory board that has a serious investment in the long term success of the company and it centralizes the effort of the entrepreneur.

There have been other opinions on the subject here, here, here, here and yes, here.

Here is Stowe’s follow up with his responses.

This is what the blogosphere exists for and I hope the conversation continues.

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About the Author: Steve is currently Managing Consultant for Appsolve, Inc., a Product Development, Management and Marketing firm. Steve is also an expert in personal branding and is an avid pilot, musician and photographer. He currently resides in Columbia, MD, USA.