The low-down Hide
Business relationships are everything for entrepreneurs. As you scale, you’ll have many to manage. And not all are created equal.
Your relationship with your business advisors will be different to that of your mentors, investors, customers, and employees. Some aspects of their role might bleed into similar territory, but advisors have a unique purpose.
But what is that purpose, and is it essential to you as a founder?
Startup founders skew young
Although talented founders come at all ages, there’s a significant segment falling into ages between 25 and 40. If this is you, you might have a brilliant idea or a fresh new perspective on an old idea. What you may lack is institutional experience.
20 to 30 years in an industry is something that cannot be bought. Bringing in an employee at this level is often financially out of the question. But without real-world knowhow, it’s easy for startups to overlook business basics, miss opportunities, and wind up in the vast and overflowing startup cemetery.
This dearth of experience is the gap advisors were born to fill. And you only have to look at the stats to identify the need.
- As we know all too well, startup failure rates are around 90%, depending on who you ask.
- In 2018, the Australian Centre for Business Growth asked 650 SME founders why they’d experienced a business failure. 25% blamed ‘lack of leadership, poor management, and/or no planning’, and 17% blamed a lack of knowledge of market research, marketing, or sales.
- Despite them being dedicated to solving the exact problems listed above, only 1 in 4 Aussie startups bring an independent advisor on board at seed stage.
- 65% of startups don’t have a formal recruitment process for board members (recruitment itself being a whole area founders have little experience in).
If a total 42% of common startup problems could be solved with an advisor or advisory board, why are so few startups taking advantage?
What does an advisor actually do?
Advisors (you guessed it) advise young startups on an informal, independent basis.
Advising early-stage companies is largely philanthropic. It’s a chance to a) give something back and b) spend time working on something they’re passionate about or interested in. Advisors will only spare a handful of hours a month, but their operational insights will guide how you shape and scale your company.
They won’t have any powers to make decisions or actions on behalf of your company. The guidance they provide will depend on your unique situation and needs, which you’ll need to communicate to them. But as a rough guide, they’ll help you with things like:
- Providing neutral council on disagreements you might be having with your co founders
- Understanding market trends and how they might affect your business
- Helping you set up departments like sales teams
- Providing access to a wider network
- Monitoring you performance and suggesting ways to improve it
As you progress under their guidance, you may choose to make the arrangement more formal. You’ll usually do this by signing contracts, scheduling more regular sessions, and offering them a percentage of equity.
Infamy vs. institutional memory
The first stage is choosing an advisor, and naturally, there are pitfalls.
You might turn to an old boss or colleague. You might approach an industry leader who’s unknown to you. Either way, they’ll need to have a strong grasp on your niche, have started and run companies themselves, and will have time spare to dedicate.
A well-known name can earn you clout. But beware the industry heroes and LinkedIn stars. Esteemed and recognisable names have many connections and broad social influence. They can be a powerful catalyst in fundraising. But consider how much further past the superficial the relationship can go.
Bizarrely, 64% of Australian company board members don’t have professional qualifications relevant to the industry they’re serving. Tokenism is rife, and the potential of the position is often wasted.
Your advisor needs to:
- Lend their time, not just their reputation
- Have relevant background in both startups and your industry
- Be willing, present, and involved rather than sitting on a token board.
Putting your advisors on payroll
As you move past the seed stage and into larger-scale funding rounds, you might be in a position to start “giving back”. However, the amount of equity you’ll give to your advisor(s) won’t look anything like what you’d give to an angel investor or VC.
A general guide is to offer between 0.1 – 1%. This will come after your first 1-2 years in business together, and after your advisor has proved their value.
0.1% is a good amount for an advisor who offers small, infrequent insights. 1% is an appropriate offer for an advisor that’s regularly involved, passionate, and has made measurable differences to your success.
If budget allows, you might also consider offering a fee for meeting attendance, in the region of AUD $500 – $1000 depending on time spent.
This can change if your advisor doubles up as an investor.
It’s a common scenario (and a desirable one) to have your advisor invest in your company. Benefit number one of this situation is obvious: if they have a financial stake, they’ll be more motivated to help. But it’s common for this to happen later down the line, when they’ve been able to influence and realise true progress, and trust that you’re going places.
Should I have more than one advisor?
You absolutely should have more than one advisor in the most general sense. It’s impossible to get off the ground without a solid network, knowledgeable friends and family, various advisors, formal mentors, or some variation on the above.
Advisors are, for the most part, free. But this doesn’t mean you should load up your trolley with them.
A startup in advanced stages of funding might reach a point where they require a full board. But again, there are pitfalls to be aware of:
- Too many cooks. As the saying goes, ‘a camel is a horse designed by committee’. Diverse opinions generate new ideas and enhance information processing (this has been scientifically demonstrated). But too many streams of input can muddy the waters, obscure the goal, and confuse the product.
- Too much time. Time is money in entrepreneurship, and the little you have outside of operational duties will be spent engaging with your advisors and investors. Anything less than 3 hours a month with your advisor is unlikely to bring real benefit (and might leave them feeling neglected). Multiply that time by three or four, and you edge into multiple working days out of your schedule.
- Not enough specificity. If you’re not yielding valuable and dynamic knowledge from your small selection of advisors, you haven’t selected them carefully enough. It’s okay to move on from advisor arrangements, or pivot to someone with more relevant expertise.
The cost of having an advisor vs the cost of… not
For startups, it’s always a question of finances. But this is one of the few advantages you can seize without major cost.
The trick is connecting with the right people. There are three ways you can go about this. Firstly, you can start dialogues with people you admire from your existing network. You can put out a call to your wider network for recommendations. Or, you can work with a scaling partner who can help you appoint advisors, manage monthly advisory board meetings, and assist you with governance at the same time.
We’ve all felt that tug of reluctance when we’re faced with asking others for help. Being set up with an independent advisory board doesn’t just remove that pain point altogether, it gives you confidence you’re working with someone who absolutely wants to be there, rather than feeling obliged to say yes.
Whoever said emotion has no place in business clearly never launched a startup.
Business advisors bridge the age and experience gap that startup founders are so often limited by.
Passion, connection, and inspiration are all key ingredients to startup success. They’re also highly valuable in advisor sourcing. An advisor contributing practical business advice can be useful. An advisor that’s bought holistically and emotionally into your mission can be transformative.