3 Reasons Why All Advisors Should Be Investors
I was sitting outside at Samovar Tea Lounge in the heart of San Francisco’s Yerba Buena Center. It was the middle of July, but the 55-degree temperature and brisk coastal winds made it feel more like late November.
“I thought this one advisor would be great with connections to multiple customers, but after signing the advisory agreement, I have not heard back from her in six months,” said an entrepreneur I know who was starting a company for remote product shipping in Europe.
“I’ve seen this before,” I said. “Did she invest capital in the company as well?”
“No,” said my entrepreneur friend. “She said that she did not have available dry powder but wanted to help out.”
After much prodding by my friend to this advisor over the ensuing weeks, nothing changed. Unfortunately, my friend terminated the advisory agreement for nonperformance and wasted six months of gestation time when she could have been growing the business.
Advisors are critical for any startup to succeed, especially in the earliest stages when mentorship and coaching are as important, if not more so, than capital. Advisors provide a crucial knowledge base of skills, sector-specific expertise, connections and recruiting ability. Advisors are often critical to closing key commercial transactions, securing important personnel or landing trajectory-changing publicity.
And yet all too often, entrepreneurs complain about advisors who are not incentivized, are nonresponsive or are too slow to provide help or feedback. Naturally, I have experienced this myself. In nearly all cases when I have confronted the advisor about their performance, they have been apologetic but eventually shifted back into being nonresponsive.
The core root of this is a misalignment of incentives. Although all advisors care about the companies they are engaged with, the question is how much? Advisors often have full-time jobs and other commitments that eat into their time and limit their contributions. This time-management challenge becomes especially acute when juxtaposed with the extraordinary overcommitment of the founders and management team.
There needs to be an element that shifts the equation.
The easiest way to do this is to mandate that all advisors be financial investors in the company as well. Even if it's just a small amount, this will help ensure that important KPIs are met on time, provide proximate investment and recruiting value, and even serve to filter out advisors who may just be looking to collect advisory shares and not really contribute to the company’s future success.
1. Investment means meeting KPIs
When I came out of an accelerator program a few years ago, I was shocked to see my friend’s software platform acquiring enterprise-level customers like Salesforce and Nvidia with only five employees. How did he do this? He ensured that every advisor also invested capital into the business.
“Not all advisors can invest $25,000 or $50,000, so we lowered the required amount. With even just a $3,000 investment from people, our results fundamentally changed,” said the founder. “They feel like real partners in the business and are motivated to help us hit our KPIs.”
For a startup, hitting key performance indicators is a crucial step toward enabling the company to raise more capital or be profitable. Defined as the steps a company strategically lays out in order to hit a certain goal or performance framework, hitting KPIs is a team effort. In a startup, where resources are scarce, entrepreneurs often rely on advisors to help them hit KPIs.
But there’s a very important difference: If a company cannot hit its KPIs, it can be fatal. But advisors can just go back to their day job or pursue another opportunity.
To even the playing field, ask all advisors to invest even a token amount into the company. If the advisor cannot afford the minimum investment, ask what they can afford and allot them a smaller amount. Although it may seem trivial, the mental value to the advisor of having capital at stake cannot be underestimated.
2. Providing better investor and recruiting referrals
One of the most important facets of raising capital is that investors like to join other investors who are “already in” with a specific company. Not only does this minimize the business's risk in their mind, it creates mutually shared value and opportunity to collaborate with like-minded people. When your advisors also invest, they become the most valuable referral network for other possible investors because no longer are they just advising the company, they are also “all in.” The conviction conveyed by investment, regardless of how small the amount may be, is critical.
This concept also extends to recruiting new employees. Often, key hires like sales leaders, developers, designers, product managers and other associates care about the conviction of those they trust when deciding whether to join a company. The mere act of investment — and the communication of that decision to potential hires — sends a message of strong conviction rather than mere advisor-level commitment.
Related: 5 Tips for Forming an Advisory Board
3. Weeding out advisors who are just along for the ride
Ensuring that advisors also invest allows founders to filter out those who may provide less value or just be interested in extracting value while providing little in return. Some business leaders, professionals and others are interested in getting involved in the so-called hottest companies, but the long-term value of such advisors is minimal. Yet they still vest stock ownership that could be allotted to those providing more value. By tying their engagement to an investment, smart entrepreneurs can filter out advisory candidates who have true conviction from those who are merely looking for a resume buffer.
In all early-stage companies, advice and coaching are often as critical as capital. Advisors provide expertise, guidance and connections that can make or break a young company. Conversely, advisors may also underperform over the long-term due to misaligned incentives. The best means to address this is to make all advisors investors as well. Doing so ensures better investor and employee recruiting success and a better opportunity to meet KPIs. It also filters out advisors who may lack true conviction.