Stowe Boyd is a retired serial technology entrepreneur who now writes mystery novels. But he also works with startup companies and he is seeing a major change in how startup entrepreneurs manage their finances. No more $10 million A rounds, with fancy office leases and high executive salaries. The chic and fashionable are officing virtually, outsourcing development to the “third” world, and using their own checkbooks to finance their companies.
The newest thing in Silicon Valley is to refuse venture capital. Can you believe that? Five years ago, when we didn’t have any venture capital to speak of in Arizona, I was screaming that we didn’t need it anyway, because it was much healthier to start businesses based on market needs and finance them with customers. I brought the wrath of the politicos down on me, as they were all trying to lure venture capital to the state or get the state to start its own fund, and my rants sounded like sour grapes sometimes even to me.
But the world has come around. Especially in the arena of Internet companies, now known as “Web 2.0” startups, venture capital is not needed. It’s relatively inexpensive to set up a web site, drive traffic to it through Google Ad Words, and finance it internally. You can start a Web 2.0 company for under $50,000. In Silicon Valley, this is pocket change. In Arizona, it’s home equity line money.
So the entrepreneur doesn’t need the money anymore. But he does need advice and help of the kind VCs (the good ones) provide.
That’s where Stowe Boyd’s concept of Advisory Capital comes in. The role of the advisory capitalist is to provide connections, networks, entrepreneurship training, and good suggestions. It’s a deeper, more intense commitment than just “consulting”; the advisory capitalist walks alongside the company for a long period of time, sometimes years. It’s her job to hold out a hand to the entrepreneur when he stumbles, to find the customer for the beta test, to tune the company messages, head off the wrong hires, and source whatever the entrepreneur needs for success.
And how does the Advisory Capitalist get compensated? Boyd is a realist; he knows that the compensation from startups can’t be commensurate with the value received. So here’s his structure for Advisory Capital (http://www.stoweboyd.com/message/2006/02/advisory_capita.html):
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.
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.
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.
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.
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.
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.
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.
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).
So I am going to follow Stowe Boyd’s lead, and the next time I reprint my business cards, I will give myself the title “Advisor Capitalist.”