Advisory Capital

Tom Evslin contributes to the discussion about advisory capital with a suggestion — give ACs equity, not options — and a question: How will startups meet the right ACs? Should there be AC firms? Good question.

I think that VC shops would be wise to set up — and arrange compensation for! — networks of advisory capitalists, who could aid the startups with advice and expertise and the VC firms with deal flow and with help managing a far greater number of far smaller investments. These relationships should not be exclusive, otherwise you won’t get the maximum deal flow and introductions and the best deals for you. As with the rest of life online today, you should think networks: The more and better connections you make, the better.

Now the problem for the VCs remains: Startups need less money and thus it’s hard to invest enough for your real clients — your investors — without stretching your real resources — your time and attention. That’s why ACs are needed: to help you reach and invest in more companies by finding them and advising them. As I said the other day, the relative value of expertise and experience grows in relation to money, so the smart VCs will compensate for the reduced need for money with increased use of targeted expertise.

Should there be AC firms? Maybe. But I think not: The value is in flexible networks, in knowing people who know people who know stuff. I fear a firm would just act like an old consultance: Hire us and buy our bullshit and take your chances. Advisory capital is about personal relationships. VCs bring other people’s money. ACs bring their own knowledge.

So I think the thing to do is to old the first ACcon: a Demo without cash, in which startups meet experts with experience and they get to know each other and test each other and see whether they want to date. It’s not much different from other networking events, like Web 2.0 and Nick Denton’s old First Tuesday, except that money isn’t the draw and the currency, smarts are.

  • I’m curious to see how all these start-ups who can launch with so little $ can crack the viability problem once they stop selling to friends and family. As far as I can tell, if they intend to scale to let’s say simply a $1 million annual revenue, you’re talking about several full time employees. With 365 days a year, there is a certain threshold of deal size to reach that magic number. Maybe I’m old fashioned for thinking in such terms, but I want to take a look at what is a delineation between hobbyists and people who take the Web 2.0 mantra seriously in terms of building businesses. To reach that threshold, these gazelles either need to sell to a huge number of small accounts or a clutch of bigger accounts. The smaller accounts presume some kind of network or affiliate structure while the larger accounts probably require dedicated sales. In each case, the customer side needs to ask “Yes, whatever you’ve built is cool and adds value. But how am I going to feel secure that within 18 months YOU are still around given that you’ve only got about 25-50K of skin in the game.”

    That’s still the part that confounds me. I can see the start-up and development costs being radically simplified because of web services etc. But I can’t see a short cut toward scaling a true $1 million a year of REAL money business without incurring some of the economic trade-offs that typify regular businesses.

    That’s why at the end of the day, I don’t see a huge difference between AC and a good board of advisors. I think that a lot of grief is going to come because the AC principle assumes that a certain defiance of gravity, when you think about it. My two cents…

  • You’re bang on with this comment: “the relative value of expertise and experience grows in relation to money, so the smart VCs will compensate for the reduced need for money with increased use of targeted expertise.”

    Studies are already finding this relationship occuring in VC transactions (you can read about it in my post on the subject) and are being rewarded for it.

    The natural progression will be for a VC firm to continue to add services that are valuable to a start-up that aren’t traditional VC value-adds. We’ll start to see various models attempted: VC firms with a number of advisory boards, VC firms with a number of “in-house” advisors, …

    As money becomes less of a scarce commodity, competition will force the VC industry into change. It’s already happening.

  • I think you, and Stowe Boyd, are bang on about this.

    Advisory Capital, or what we call Mentor Capital, is a value onto itself.

    We have carved out a niche doing this north of the border, so it will be interesting to see if that replicates well or if the B/S consulting factor takes over.

    As for a confernce on this…Mr. Boyd, myself and the gals from Under the Radar were just discussing that…so you never know….

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