May 22 2008

Guest Post: The role of company advisors (Part I)

One of the things I enjoy the most about writing this blog is the discussion I engage in with readers – both through blog comments and in direct emails.  Over the past month I’ve had a particularly enjoyable exchange with Gerald Joseph.  One of the topics we’ve discussed is the role of advisors in the life of a start-up.  I generally think of advisors as non-paid "friends of the company" and as you’d probably guess, advocate a pretty deliberate organization and use of advisors.  Gerald’s view is a little more expansive as he thinks of "advisors" as the larger ecosystem that surrounds (or should surround) a start up company – one that includes people you pay (attorneys, CPAs, etc) and the people who pay you (your angel investors) in addition to the business and industry experts that are the typical "advisors" to young companies.  I like this line of thinking and offered Gerald the chance to put his thoughts into a post.  He took me up on that idea and came up with a four part series on the topic that I’ll put up over the next few weeks.  After the final post I’ll summarize some of my thoughts as well as comments from readers (and please – comment away!).


Is an Advisory Board or Advisors necessary?

Well, Advisors and Advisory Boards are not an absolute necessity for all startups. Their usefulness and necessity has to be evaluated on a case by case basis. Having Advisors or an Advisory Board is a completely voluntary decision. Advisory Boards are not legal entities like the Board of Directors.

Many experienced entrepreneurs keep their Advisor relationships very private and informal. They have plenty of Advisors that they speak to whenever the need arises and no formally declared Advisory Boards.

Successful serial entrepreneurs usually have a network of influential friends who are greatly interested in their personal success. They do not need formally declared Advisory Boards. Serial entrepreneurs often have the luxury of receiving assistance from their Advisors irrespective of the merits of their ideas and without the promise of equity.

However, this is not the case for your average Startup Founder. Many Founders are recent grads, college dropouts, or young professionals with no track record, no network, and a good idea in need of a supportive environment to germinate.

In these cases, Advisors help "round out" the strategic thinking/planning of early stage Startup Founders and C-level managers.

Capacity building is sporadic at best in early stage startups. It is very difficult for startup founders to train themselves and get up to speed on every critical issue concerning a startup company’s development. Good Advisors can fill this gap by lending their skills to solve problems that fall outside of the Founders areas of expertise.

What do good Advisors do?

Well, essentially good Advisors do what needs to be done. If your startup is operating in a complex market with plenty legal entanglements such as IP drama, then your startup would benefit greatly from having a Venture or Patent Attorney as an Advisor to draft legal strategy, contracts, and act as an in-house repository of legal info.

In addition to completing a specific scope of work, good Advisors usually do most of the following:

Reduce or eliminate the risks associated with "blind spots"

– startup founders usually lack knowledge in numerous areas not related to the technical development of products/services. The implementation and management of financial systems is customarily a significant "blind spot" for most entrepreneurs. This is a complicated area where advisors with finance expertise can roll up their sleeves and implement standard practices that make it easier to track the company’s financial well-being. A CFO or CPA with venture experience can be invaluable as a Finance & Accounting Advisor working on a part time or flex time basis until the operational budget allows for the hire of a fulltime CFO.

Provide "actionable" advice

– it is critical that Advisors provide straightforward, down-to-earth information. This info must be readily digestible and easily implemented into the existing operational infrastructure of the company. Advisors should present startup Founders with ideas or information that is fully fleshed out and easily applied to their unique situation. An Advisor’s idea for a new revenue model or product feature should be presented in an easily understood format illustrated with pertinent industry forecasts, assumptions, metrics, risks, and projected results.

Make important introductions

– Advisors introduce Founders to reputable prospective investors, employees, partners, and customers. The evolution of a startup from concept to seed stage to exit is partially dependent on the quality and reliability of the Founders’ network.

Make ‘way too early’ investments

– often in early stage Startups, Advisors and Angel investors are one in the same. It is not uncommon to see a CEO/Advisor relationship crescendo to include a significant pre-prototype investment of cash and non-cash resources (servers, office space, etc.). In many cases, Advisors are investors of first resort during the early conceptual phase of a startup when very few VC’s or Angel Investors are usually interested.

Provide informed consumer-centric validation of core value propositions

– in most cases, Advisors are current or prospective prime consumers of the company’s products or services. One of the most significant perspectives that many advisors bring to the table are strategic thoughts and usability innovations based on their informed experiences as consumers and/or analysts within the Startup’s target market.

I think it is always best for Startup Founders to actively pursue relationships with prospective Advisors and Mentors. Building a network of confidants is an ongoing endeavor that reaps long-term rewards before, during, and after the lifespan of your association with your Startup.

One thing that we all seem to overlook is that there is life after a Startup. Especially for serial entrepreneurs who go from one startup to another, building relationships with influential people that you like, trust, and can learn from is essential. Your network will work for you personally and professionally for a lifetime