Stowe Boyd has a good post on a topic that was the source of many internal discussions at SelectMinds for the founding team. Often in the earlier stages of a company, especially if it’s a promising idea the founding team not experienced in the process, the founders find themselves surrounded by an assortment of advisors. These can include fundraising consultants, investment brokers, industry pundits, PR specialists and academics. This usual cast of characters are walking thorough the door and making promises, typically tied to some incentive compensation. It’s usually pretty overwhelming.
Stowe argues that this role can be defined as Advisory Capital, and describes it as a fusion of the venture capitalists’ and advisory board members’ roles. He asserts that they offer:
"It’s not money, however, but the experience, expertise, social capital, and public authority that advisory capitalists invest."
I think he’s got a great point. The difficulty is how to sort the valuable advisor from the big-mouthed over-promiser. In choosing a VC, you have term sheets on the table; and thus, some tangible comparison criteria. In the advisory capitalist, there exists no such term-sheet.
I do agree fully, though, with Stowe’s point that:
When the underyling economics of innovation have shifted so
drastically — cheaper high-powered servers, open source LAMP stack,
accelerated development tools and techniques (AJAX, Ruby, Php, etc.) —
more and more companies can bootstrap from pocket change, and be up and
running in less time than it takes to secure capital. As a result,
going the VC route is increasingly seen as a brake on this class of
tech innovation, not an accelerator, at least in the very earliest
But the needs of today’s start-ups for quality advice and guidance
has not changed, but because the VCs have a harder time getting
involved — they aren’t geared to make <$50,000 investments,
The net effect of the above issue will be the creation of smaller, more specialized VC outfits. One example I can think of is Union Square Ventures. Fred Wilson and Brad Burnham are experienced and reputable enough that they could have raised a larger fund with broader ambitions, but I think they recognize their competitive advantage well and will be more effective in their current set up.
UPDATE: Fred Wilson has his answer to Stowe’s post on the USV blog.