Wednesday, July 6, 2016

7 Keys To Signing Business Advisors That Add Value

John_Elkington_advisorIn my role as an angel investor to startups, I’m struck by the broad variety of advisor strategies I see in investor presentations and business plans that cross my desk. Some entrepreneurs are “lone rangers,” never mentioning any outside guidance, while others tout dozens of advisors. In my experience, both of these approaches will likely have minimal value for your venture.

Few entrepreneurs, no matter what their background, have the breadth of experience and expertise to face all the challenges of a new startup without relying on some guidance from an engaged and committed advisor. Even the best of us needs someone we trust to bounce ideas off, or challenge our perspective on a regular basis. That’s the function of a good advisory board.

Thus I believe every smart investor, potential partner, or critical new hire will look for a properly built advisory board as a key criteria before selection or making a commitment. In my experience, the key parameters for building that winning advisory board should include the following:

  1. Select people who fill gaps in your own team. If your startup team is highly technical, an advisory board member with a strong financial and business background clearly adds value. In other cases, an advisor with strong customer, distributor, or celebrity status might be important. A long list of friends or associates is usually considered a negative.

  2. Keep the advisory board to a manageable size. Communication and organization is always a challenge, so three advisors is about the maximum that any entrepreneur can handle. If you have more, they better be major investors or partners who will likely be part of your formal Board of Directors at a later stage. Advisors in name-only will hurt you.

  3. Compensate advisors for their time and commitment. While it’s possible to have reciprocal agreements or friends willing to seriously engage, most often you get what you pay for. A common stipend might be one percent of your stock, or a few thousand dollars annually to cover expenses. Don’t expect valuable and busy people to work for free.

  4. Establish advisory board agreements to set expectations. As you add a member to your advisory board, you should give them an agreement in writing on what is expected in terms of time, responsibilities and term of office. This will assure no surprises on either side on role responsibilities, confidentiality, level of availability, or decision authority.

  5. Budget your time and effort to effectively work with advisors. One of the biggest mistakes I see is an entrepreneur who only communicates with advisors in a crisis (too little, too late). Recognize that it takes a minimum of a couple of hours a week to meet with the right advisor, and communicate status to all, in addition to more hours up front.

  6. Schedule and prepare for regular advisory board meetings. In addition to individual advisor meetings, you should schedule a meeting of all advisors each quarter. This should be structured and run as a formal Board of Directors meeting, including major milestone achievements and plans, as well as strategy and issues discussions.

  7. Don’t be hesitant to add or subtract members as your needs change. As your startup grows into a business, you may hire a CFO to replace your financial advisor, and find you need an advisor in new customer segments. A good advisory board gently evolves into a formal Board of Directors without upheavals or changes in direction.

Advisory boards that exist in name only, or have non-committed members, can actually have a negative value to the entrepreneur, by elongating decision times and providing poor quality guidance to the business. This often leads to a death spiral for the board, and subsequently for the startup. Thus the negative implications go far beyond the difficulty in attracting investors.

Smart investors believe that a top quality team is more important to success than any given startup idea. An engaged advisory board is an inexpensive way to add power to your team where and when you need it most. For long-term success, make it happen, and highlight it in every pitch and business plan you produce. There’s no better way to use your precious time and resources.

Marty Zwilling

*** First published on Forbes on 06/29/2016 ***



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