Thursday, March 02, 2006


Thoughts on Advisory Capital

I just clicked publish on today's blog entry when I ran across an article by Stowe Boyd on the notion of advisory capital. I am curious if my thoughts and his are on a collison course...

Some folks are of the belief that VCs do it better. Others have acknowledged that in order to get an idea off the ground, less money needed for startups means that more businesses can get by without VC money. In fact, VC money typically isn’t available if you need less than a million dollars.

Stowe’s answer is that you need Advisory Capital – everything that VCs do minus the money. He calls it “capital” because he means you to treat it that way. “Like venture capital, advisory capital is about the investment of a critical resource into a startup. It's not money, however, but the experience, expertise, social capital, and public authority that advisory capitalists invest,” he never really mentioned how this is different than industry analysis which we know is coming under attack...

The problem that I have with this suggestion is that it ignores the needs of the customer. Instead of finding folks to claim to have insight into customers, why not ask the customers themselves to serve on your advisory board? After all, they will have more skin in the game and a vested interest in success than what Stowe is suggesting. Advisors or consultants who are working for a salary (full or reduced is irrelevant) are not taking significant risk in their role and therefore should not expect much reward on in the upside. It feels somewhat dishonest to use the term advise in one sentence but to then not acknowledge a basic principle that risk = potential reward.

Maybe CTOs should be discouraged to not dilute equity in this manner and simply ask the opinion of enterprise architects? Maybe these architects don't want to be paid which keeps costs even lower but simply want software to run their business. Feels like more skin in the game than the value proposition offered by rebranded industry analysts and consultants but I will let the blogosphere determine their real value...

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