Stowe Boyd has an interesting post on the idea of advisory capital (as opposed to venture capital).
Stowe observes correctly that many tech startups don’t need nearly the amount of startup capital that they used to need to build a business. We all know the reasons for this so I won’t get into them. Stowe mentions a few of them in his post anyway.
And Stowe goes on to point out that many VCs won’t or can’t get involved in companies unless they can invest millions of dollars ($3 million to $5 million are the minimums for many top tier venture firms).
And so he concludes that many tech entrepreneurs will not be able to tap into the venture capital market for the things that VCs bring in addition to money – advice, counsel, oversight, relationships, etc.
Stowe suggests that industry insiders who have the knowledge, relationships, and experience can fill the gap. He suggests that entrepreneurs take the notion of an advisory board one step further and put a few strong advisors in the role of VCs. Put them on the board and give them meaningful stakes in the business (but certainly less than VCs would get) in order to get the advice, counsel, oversight, and relationships that VCs would otherwise provide.
I think Stowe is right that advisors have a growing role in the startup equation for many of the reasons that he articulates. But I think it isn’t possible to completely replace the role of the VC for a couple of reasons.
1 – Unless you have capital at risk or some other form of “skin in the game” like sweat equity, you cannot and will not feel the thrill of victory and agony of defeat that binds the VCs and entrepreneurs in startups. Capitalism works for a reason. Greed and fear are powerful forces. I have worked with many “independent directors” over the years. And they are often incredibly good directors who add value in all sorts of ways. But they don’t feel it in their gut the way the entrepreneur does. VCs, particualarly the best ones, do feel it in their gut. And so they are there for the entrepreneur when they need it most, joined at the hip with the risk/reward belt.
2 – There is a growing market of angel money that is sophisticated and acts a lot like VCs. There are even “super angels” like Pierre Omidyar, Mark Cuban, and the like who can invest as much or more than most VCs in a deal they like. These angels bring most of what a VC firm can bring to the table if they so choose and can write smaller checks. I’d suggest before entrepreneurs give equity to advisors for no cash, they think about angels instead.
The bottom line for me is that cash at risk is a critical part of the relationship between the entrepreneur and their VCs. It provides the foundation for all the other roles that the VC plays – advice, oversight, connections, etc. Without it you won’t get close to what you get with a VC.