Startups: raising money, building an advisory board, and what do you think of my idea?05.22.11
When I meet with particularly early stage startups, here are 3 topics they often want to talk about:
1. Raising institutional money (or at least money from well-known angels)
2. Building an advisory board
3. What do you think of my idea?
Seems pretty reasonable right? After all, a startup needs money to thrive (or at least establish itself and prove its concept), an advisory board can provide valuable advice and connections, and wouldn't I be a good source of potential validation or critique of what they're working on?
I have a suspicion I'm a contrarian on all these points so let me elaborate. If you're a startup and have no money -- sure, go get some money :) But a lot of startups I meet already have money -- often from friends, family, or even an angel who has put in a very small amount. Maybe they don't even need a lot of money because their burn rate is low. So why even raise money in those cases? Frankly, I don't know. I think, for a lot of startups, there's this psychological need to raise money -- as if getting money from a (prominent) VC will somehow further ensure their success. I find this thought a little baffling -- but that's partly emanating from my own personality.
At the very core of it, what are you getting when you raise money? Money. If you're trying to get something else (brand equity, connections, etc.) -- there are way more direct ways to do those things. Let's take an example. Let's say you're a startup that's raised several hundred thousand dollars. Or maybe you already have a technical cofounder (or you are one yourself) and have enough to get a prototype off the ground. Either way -- you can get to market without raising additional funds. So get to market! Raising funds is really time consuming, distracting, and most importantly -- takes you away from the most important task at hand -- building something that is useful, that customers respond to, and has the potential to get market traction.
Let's look at the second question -- building an advisory board -- because I think some of the thinking is similar to the first question. First off, Mark Suster has a good posting on this topic [link] so I encourage you to check that out. I'm obviously ok with advisory boards -- after all, I am an advisor to several startups :) -- but I often think this is a waste, or at the minimum, a waste of management resources or a really expensive way to get connections. Broadly, there are 3 types of advisors:
1. Advisors who lend you brand equity -- famous in tech, investing, generally, or have some sort of senior title at a well-known company (e.g. COO of American Express)
2. Advisors who are well-connected / claim they can make introductions for you
3. Advisors who can help with operational issues
I would say most advisors fall in categories 1 or 2 and my general opinion is those people are a waste of time and an inefficient use of equity. Brand value is fine but it's way more helpful if those folks were actual investors -- it doesn't take a lot to accept some small percentage of a startup :) The hope, obviously, is that by their lending their name to your startup, it makes it more appealing to venture capital firms. VCs, of course, know exactly how this game is played and put the equivalent value on it -- which is not much. In terms of introductions -- it's a lot cheaper (and better for you and your startup) to simply rely on making friends to make introductions. What if you don't have the right set of friends? Just get out there -- the tech world (especially in the Valley) is pretty tight knit and reasonably straight forward. If people like you (and especially if they like your company) -- it won't take much for them to offer to make introductions. Beware especially of the people who contact you first / are aggressive about becoming an advisor because of all the people they claim to know. The third bucket, advisors who help with operational issues -- is probably the main group that I think adds value. But here's my big caveat with this group. The typical conversation I have with startups here is that I usually can guess what type of advisors they're looking for. If they're a financial tech startup -- they'll start off wanting someone from finance, then someone from tech, then maybe a prominent angel -- basically they're looking to cover off all their bases in terms of all the areas their company touches and getting someone associated with each area.
Here's why I'm broadly opposed to this approach. Solve problems when they're problems. Some problems, because of the long lead time involved and the low cost of getting the ball rolling -- you want to solve early. For example, let's say you know you're going to have a legal issue that's going to take 6 months to solve and you can start working on it now simply by having a few meetings with your lawyer. Sure -- have those meetings. But what I more frequently run into is this sensibility of basically over planning for the future. If you're a startup with no product (and thus, no customers) -- I would say that's the first thing to work on. Get a product to market. Don't worry about an advisory board. When it's apparent you need an advisor, go solve that problem. Maybe you're building a tech startup that heavily focus on another industry (e.g. fashion) -- you've built a great product, gotten a lot of interest, but can't seem to understand the industry. That might be a good time to bring on an advisor that can help you navigate that world. But even then, that's a really tricky road. It's not enough just to find someone with the right title, etc. -- you need to find someone that actually knows how to work in this capacity and can guide you correctly. That takes a relationship built over time. Meet with these folks and build a dialogue. They should be willing to meet for free and give advice for free. If it becomes something more substantive over time -- sure, think about an advisory board. But go get some data points to make sure they're worth what you're thinking they might be worth -- a piece of your company!
Here's the last, probably seemingly disparate, idea that I want to tie in for this post. I almost always invariably get asked, "What do you think of my idea?" There are obviously ideas I like more than others. However, short of me hating the idea / seeing some enormous problem with the idea -- most ideas fall into the, "It doesn't matter what I think of your idea, go launch your product." Here's why.
I think the most important thing about startups is getting out into the market and iterating. That's it. Start with a idea and see what aspect of it people respond to. But isn't that too small thinking? Shouldn't people be thinking about solving some gigantic, unsolved problem? Sure -- I guess -- but this isn't like mathematics where they have a list of famous, unsolved problems. This is about doing something centered around value -- value to a customer. Is what your startup doing providing value? If it is, you have a viable idea. Then you can start thinking about how best to monetize that value and also how much value it provides (i.e. is this a big idea?) But for me at least, I think there's too much of an assumption of one's ability to predict the answers to all 3 -- but particularly the latter two. My broad feeling is that this is relatively unknowable -- so in that case, you use judgement and make your best guess -- but most importantly, you get into market and let the market tell you. You don't depend on advisors, investors, etc. Sure -- get their feedback and be smart about integrating it -- but have a bias for action. I guarantee that the Twitter folks didn't know they were founding Twitter when they founded it. But you know what they did? They founded it and got out into the market!
My broad point of this article is that, at least if it was me, my singular focus would be on creating a product that provides value and getting it to market as fast as possible. Would I want to raise money? Not if I could get a working prototype to market to validate the idea / product without needing to raise money. I would much rather raise with a working product that has paying customers than with a stack of paper. Would I get advisors myself? Only if I knew them, had several data points in our relationship, knew exactly how they would provide value on an ongoing basis -- and most importantly, knew I needed their expertise on an ongoing basis. Would I run around getting feedback on my product? Yes -- but with a big caveat. When I was a PM, I would get lots and lots of feedback -- in fact, I would even read the emails that would come through the customer service bins. But what I wouldn't do -- is overly rely on, say, the execs at my company for product feedback. I would go to them if they gave me good feedback once -- but I wouldn't depend on them -- at all -- based on the fact that they had a fancy title. I feel the same way with investors and other folks -- don't be seduced by their position to think they're going to give you the feedback you need. Have a bias for feedback based on the quality of feedback not based on some perceived idea of the quality of the source. This is why I read customer service emails. Those emails told me (in a roundabout way typically because they're just describing problems they're having) -- but they still told me what I should be fixing or building next.
But at the core of it -- running around getting feedback, or at least getting it inefficiently -- means you're being slowed down from launching. Being slowed down from launching means you're cutting yourself off from your best source of feedback -- the market.
Get to market, listen to your customers, iterate quickly. Have a singular focus on this. Solve gating factors aggressively but everything else is just distracting.