There’s a time in every ambitious startup company’s life when the knowledge and experience existing within the team just don’t cut it anymore. Perhaps it’s the founders who recognise their weaknesses and seek help (a sign of strength), or it’s the early investors who notice the first warning signs and want to prevent the inevitable from happening. Either way, we have an early-stage company and a founder who needs an advisor. Or two. Or three. Where to start and what should be kept in mind? How can angels help their investments to thrive? Here’s our take on the fine art of asking for advice for a startup.
Step 1: Finding the people
The hard way
Let’s make one thing clear - one of the most important prerequisites for a company to succeed is that founders have the domain knowledge, at least to some degree. Only by knowing the problem inside out can they come up with a brilliant idea that solves the pain for the customers in a way other solutions don’t. It doesn’t necessarily mean that founders must have worked in the industry for decades, but knowing what is going on in the field, how the sector operates, and what alternatives and solutions are already available for that specific pain is important. Obtaining and gathering this knowledge takes time and effort - doing so while starting the company is a recipe for failure.
While accumulating the knowledge, the founder also builds their network. And for an experienced founder, this is the best starting point when they detect a gap in their know-how - people they know. Unfortunately, one’s own network only takes them so far. And what if the network is small to start with? Cold contacting is the answer, but here’s the thing - the founder must still be familiar enough with the sector to know whom to approach in the first place. They must also have the courage to get in touch with complete strangers, the persistence of a pit bull to keep the contact going, and a great pick-up line or elevator pitch won’t hurt either. All in all, it’s hard work that every founder should be already accustomed to (if not then we have another problem at our hands) - but there are also other ways.
The shortcut way
Incubators and accelerators have built their business models on providing the best mix of experts that will help startups grow. These programs may focus on a certain stage of the company or specific sector and industry - either way, the management has spent a lot of time and done the majority of the leg work for the startup by having a list of validated mentors lined up who are all willing to share their knowledge. It’s a great shortcut if the startup matches the program or industry focus. Incubators and accelerators usually also have a wide network which means that founders can be introduced to people they otherwise wouldn’t get in touch with. For a founder, it’s like walking to a mall and cherry-picking the desired expertise. The convenience, of course, must be paid for - in accelerators usually by giving up equity falling somewhere in the higher end of single digits.
The smart way
We have said it before and say again that angels are the best source for the company’s seed funding not only because of angels’ willingness to take early-stage risks and co-invest with smaller amounts but also because of the expertise and network they bring along. A smart founder who has raised funding from angels will want to use all of that to the benefit of their company - either by asking advice from the angel (who usually has solid experience in some specific field) or utilising their network. In our experience, a vast majority of angels looking for contacts or experts are actually doing it for their portfolio companies. Being the investors and having a stake in the company, they have a very high motivation to find suitable advisors for the founders and with the help of other angels in their group, great contacts can be found across the globe.
Step 2: Choosing the right advisor
Navigating in the waters of the sea of experts is a tricky task. There are a lot of people willing to share their knowledge with the founders and finding the best cooperation model is crucial. One of Dealum’s founders, Rein, wrote a great blog post some time ago highlighting the differences between mentoring, coaching, teaching, and guiding - something to keep in mind when choosing your advisor. What else is important? We believe the founder should pay attention to two more things - relevance and balance.
No, we do not speak geographically here. We are talking about the stage the startup company is currently in. The best mentors and experts come from companies that are a maximum of three or four years ahead of the startup seeking advice. There is no use of the words of Fortune 500 CEO for a company that hasn’t yet found its product-market fit - the gap between the worlds they operate in is simply too big. An already successful CEO doesn’t remember the early-stage struggles that happened ten years ago and cannot relate with the founder. Unicorns and top companies are great for inspiration, but not so good to help solve the more mundane problems the startup faces.
It makes more sense to approach other founders and specialists that are coming from companies in the next stage. They still remember how the pain felt and are up to date with the current affairs in the industry - this way they can give guidance on which direction to look into, what they did to solve the issue, and what other options are available. The advisors from other startups may not be running unicorns or top companies (yet), but they have been in that exact same place only recently and understand where the troubled founder is coming from - the advice is much more valuable when it is matching the company stage.
Another important aspect is to ensure there is give and take balance so that both sides feel empowered and motivated to work together. Neither side should feel significantly in dept to the other and finding this balance can sometimes be difficult.
The compensation models vary widely from being purely emotional (helping a startup solve a problem that is close to the advisor’s heart) to entering the cap table. With the latter, the founder must be cautious as advice is needed in every stage of the company, but there are very few experts who are valuable thorough the company’s life span. It’s a slippery road to have many advisors on the cap table who have exhausted their input but continue as zombie shareholders. The cap table is something the founder must feel rather precious about and equity should normally only be exchanged for measurable values, such as investment or hard work.
In our experience, experts provide the most value when their involvement is limited to a short time period (e.g. 2-20 hours) - this way they give the boost needed to solve the specific struggle and then move on. For this level of involvement, the best solution is to compensate the advisor’s hours with money. An hourly rate paid for their time spent on sharing the specific knowledge is money well spent for the company. If the cooperation works out brilliantly and the expert is interested in a long-term relationship contributing their time and knowledge continuously then equity is a viable option, but it should be kept to around 0,25-1%.
Step 3: Working together
One thing is to find an advisor, the other is to take their advice. This too is an act of delicate balance between ignoring the specific suggestions (when needed) while utilising the deeper learning.
Behind the scenes, a term that is often used by mentors is the founder being “coachable”. What it means is that the founder must listen and understand what the expert is saying and ultimately utilise this new knowledge in the context of their company. Sometimes founders love to talk to people but do not take time to digest what is being said and put the learning into practice. A critical analysis of the input becomes increasingly crucial when the founder is involved with more than one expert at a time (e.g. during the accelerator or incubation program) and the advice from different experts is diametrically different. This happens surprisingly often.
The expert can never understand the detailed nuances of the environment the founder operates in but rather come from their own background. There is no universal truth - picking up the gold nuggets from each expert and combining them into your own understanding is the way to go. Even if not taking the advice word by word, the expert will appreciate seeing that their input has been processed adding value to the company and for the founder.
How angels can support this process for the founders is to make sure they don’t pressurise the founder into making decisions based on expert opinions alone. Have faith in your founders! As an angel, you have invested in the team and their competence - a critical view from another person who doesn’t know the business in details the way founders do should be treated with healthy scepticism also by investors (even if that other person is investor’s friend). As with doctors, a second or third opinion is important therefore helping founders find knowledgeable people is the best assistance angels can give to their portfolio companies.