Understanding Advisory Capital
Sam Huleatt asked:
What is Advisory Capital?
“Advisory capital is an investment of experience, expertise, social capital, and public authority into a company in return for some form of equity in the company”
Advisory Capital, a new variation of venture capital investing, is the direct result of a changing landscape among venture capitalists and entrepreneurs. This landscape has seen a flux of startups that are able to bootstrap on the cheap, forsaking traditional venture rounds while still achieving tremendous market success. Examples of such successes include many web 2.0 companies such as Flickr, JotSpot and Weblogs. Even traditional venture capital firms have acknowledged this shift in financing requirements. Guy Kawasaki has a fascinating post on how he built Truemors for $12,107.09. Charles River Ventures recently launched its Quick Start Program, offering up to $250,000 in the form of convertible note loans to promising entrepreneurs.
States George Lipper of the National Association of Seed and Venture Funds:
“The [issue] is the mismatch between the needs of worthy start-up entrepreneurs for relatively small amounts of venture funding and institutional venture capitalists who cannot dedicate the time to justify dealing with small investments. Hence, we’ve watched a steady erosion of the share of venture capital (and therefore VC’s time) directed to the seed and start-up stage to about 2% of available capital…while expansion and later stage investments claim 80%+”
For startups, advisory capital can be the best of both worlds: the ability to eliminate cash investment (resulting in significantly less dilution for founders) while issuing minimal equity, sufficient to recompense the benefits of the “advisory” portion of a VC or angel relationship. I believe that advisory capital can also be thought of as a “bridge investment,” helping young companies to build their valuations prior to an angel or series A round of investment once initial market traction is obtained.
However, the role of advisory capital consultants is questioned by some. One major concern with such a model is the absence of what Union Square Ventures calls, “capital at risk.” The argument is that the risk of monetary investment “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.” However, Stowe Boyd, the inventor of the advisory capital phrase combats the USV position,
“As some of my existing portfolio of advisory capital clients are acquired, go public, or start paying me dividends, I might start investing hard, cold cash on top of the hard, cold advice I am doling out.”
Returning to my position that advisory capital is best used as a “bridge,” working with the right AC individual or firm should result in connections to and desire for angel investors. Unless a company is simply developing a lightweight application, the need for outside capital will likely always be there. Venture capitalists should ultimately look to develop relationships with these AC firms who can act as a filter, helping to vet investments and implement early-stage best practices; the foundation for long term success.
Ultimately, the advisory capital role is a catalyst to the next stage, an opportunity at the most favorable cost to the founders and a risk-minimizing technique for future investors - a win, win for everyone.
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What is Advisory Capital?
“Advisory capital is an investment of experience, expertise, social capital, and public authority into a company in return for some form of equity in the company”
Advisory Capital, a new variation of venture capital investing, is the direct result of a changing landscape among venture capitalists and entrepreneurs. This landscape has seen a flux of startups that are able to bootstrap on the cheap, forsaking traditional venture rounds while still achieving tremendous market success. Examples of such successes include many web 2.0 companies such as Flickr, JotSpot and Weblogs. Even traditional venture capital firms have acknowledged this shift in financing requirements. Guy Kawasaki has a fascinating post on how he built Truemors for $12,107.09. Charles River Ventures recently launched its Quick Start Program, offering up to $250,000 in the form of convertible note loans to promising entrepreneurs.
States George Lipper of the National Association of Seed and Venture Funds:
“The [issue] is the mismatch between the needs of worthy start-up entrepreneurs for relatively small amounts of venture funding and institutional venture capitalists who cannot dedicate the time to justify dealing with small investments. Hence, we’ve watched a steady erosion of the share of venture capital (and therefore VC’s time) directed to the seed and start-up stage to about 2% of available capital…while expansion and later stage investments claim 80%+”
For startups, advisory capital can be the best of both worlds: the ability to eliminate cash investment (resulting in significantly less dilution for founders) while issuing minimal equity, sufficient to recompense the benefits of the “advisory” portion of a VC or angel relationship. I believe that advisory capital can also be thought of as a “bridge investment,” helping young companies to build their valuations prior to an angel or series A round of investment once initial market traction is obtained.
However, the role of advisory capital consultants is questioned by some. One major concern with such a model is the absence of what Union Square Ventures calls, “capital at risk.” The argument is that the risk of monetary investment “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.” However, Stowe Boyd, the inventor of the advisory capital phrase combats the USV position,
“As some of my existing portfolio of advisory capital clients are acquired, go public, or start paying me dividends, I might start investing hard, cold cash on top of the hard, cold advice I am doling out.”
Returning to my position that advisory capital is best used as a “bridge,” working with the right AC individual or firm should result in connections to and desire for angel investors. Unless a company is simply developing a lightweight application, the need for outside capital will likely always be there. Venture capitalists should ultimately look to develop relationships with these AC firms who can act as a filter, helping to vet investments and implement early-stage best practices; the foundation for long term success.
Ultimately, the advisory capital role is a catalyst to the next stage, an opportunity at the most favorable cost to the founders and a risk-minimizing technique for future investors - a win, win for everyone.
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