A few months ago I had to get rid of a closet we had in the apartment and didn’t fit my wife’s ideas about re-modeling the apartment. The challenge is that we live in the 6th floor and the closet was too big to fit in the elevator. Quite a problem. Of course I could hire someone or call for help but that will be like paying to win in my gamified way of thinking. Challenges are fun and this looked like one I can solve. My idea about solving it was to use gravitation as the driving force and basically slide the closet down the flight of stairs between every two floors. This way I’m going one floor at a time and can take time to recharge in between. There were still challenges turning it around, balancing and safely anchoring to avoid me sliding with it all the way down but it was basically a sound plan. Ten minutes later, as I’m pushing, balancing, tilting and pulling the closet neighbors started coming out of their apartments and making different comments. I could easily divide them to two groups, the skeptics and the advisors. This was a bit amusing, as these are exactly the same types of comments you get when you start a company or a game.
Why do people want to become advisors
Like in the story about the closet, startups tend to attract many advisors. It’s a desirable role as the risk/reward make it a very good investment. It’s interesting, prestigious and potentially lucrative while the the commitment is usually flexible. You can basically divide the value of advisors to two categories: Mentors and Connectors. Let’s go over the types and learn to deal with each kind.
Mentors provide perspective and help you think about your business
These type of advisors should guide you through different situations. Mostly related to fundraising, management and strategy. Most startup founders are lacking experience in these areas so it makes sense to receive advice and get feedback.
The diminishing returns of mentoring
The value of the feedback from a certain person however, tends to decline over time unless he actively gains further insights as time goes by. If you are a nice person with a solid idea you can usually get the same value in two ways:
- Meet many people and ask their advice about different topics. This often requires you to do a lot of networking and come up with presentable material that people can comment on.
- Find an advisor that will basically do the same for you. If you choose this path, it’s important that the advisor will know that his job is to keep generating insights through meeting other people rather than just share the thoughts he already has.
What to focus on when evaluating different mentors
The second way, requires further explanation. There will be many people that will offer free feedback – take it. As for people who ask for equity for their feedback try to evaluate if they are likely to gain further insight into your business as time goes by. If you are going to give a significant amount of equity (5%-10%) you can find people who will proactively go out and look for feedback about your business. Most advisory engagement however are between 0.25% and 1% (depending on your company’s stage). This is not enough equity to get someone really working for you but you would still want them to generate a stream of insights to qualify as an investor. This usually happens when the person has some other capacity that exposes him to insights about your business. For example, if he is the CEO of a company in your immediate ecosystem.
Connectors help you get to people you need to reach
These type of advisors are mostly related to fundraising. While in a round you would want to meet as many relevant investors as possible. You will need many introductions from different people.
How many introductions can a single person make?
Like with the first type, there is a limited amount of intros you can receive from a single person. This doesn’t depend on how much equity you give him or her. I have received 6 warm intros from people who just liked what we do and at the same time people who had really only 1 relevant intro tried to ask for equity claiming that they can open many doors. Moreover, once someone has an incentive to make the intro, the investor receiving the intro is more likely to filter it. This problem increases if the hired advisor has many similar engagements – the investors don’t want people to be ‘goods’ that different people ‘sell’.
Like with the first type, there are two ways to get connected with investors:
- Meet as many relevant people as possible. Mostly founders and relevant people in the eco system (avoid time wasters). Try to convince them that what you are doing is something the investor will like by showing them your investor pitch. Once they are convinced, ask for intros to investors who will like this.
- The only way to leverage a hired advisor in this aspect is if he continously gets access to new investors and can do part of the pitching work for you.
Can someone else pitch for you and do you really want that?
The problem with the 2nd way is that the advisor becomes the front-end of the fundraising effort. It requires him or her to be deeply involved and to be able to deliver the pitch with the same level of enthusiasm. Usually, this role is more of an active chairman role and the equity cost for that is much higher. I don’t have experience with this type specifically, I think it can work for some founders but it requires the CEO and chairman to work in perfect coordination while fundraising. If you are not interested having a chair man in your startups, my adivce is to skip connection advisors all together. If you can’t get free intros, something is broken with your startup or with the way you pitch it – go and fix that.
Mixing both type of advisors
Getting free startup advice and intros