A discussion is raging on the web among bloggers who have an opinion about Advisory Capitalists.
First, let me tell you what I think is meant by this new term. I believe it is intended to represent a group of people who have become powerful (my word) in the web 2.0 economy by being early adopters of new technologies, specifically by blogging and networking on-line. They have developed genuine expertise and influence in an emerging industry--expertise and influence that previously was found primarily among venture capitalists whose money garnered them their power. Advisory capitalists do not contribute capital, but provide that power and influence that venture capitalists traditionally do.
By extension, the label of "advisory capitalist" can be applied to any advisor, consultant, guru or guide who provides, under any basis of compensation, assistance or advice to early stage businesses.
Now, let me say that it is a good and wonderful thing that the Internet economy is such a pure manifestation of a free market, merit economy. The relative worth of an idea, a technology or a company can be vetted by the market in almost no time. Incremental improvements occur in days or even hours. Radical steps appear in a few years or even months. In contrast, the telephone predated the wireless phone by many decades.
Within this fast moving economy, the relative value of contributions can be measured and rewarded quickly.
Fundamentally, I believe that those who are concerned about the advent of advisory capitalists are concerned about their making off with too much value relative to their contributions. Everyone worries about the same thing--only the perspectives are different. Entrepreneurs and angel investors worry that venture capitalists take too much value. The VCs worry that the advisors take too much value. I'm reminded of a phrase we used a lot back in my tenure working on capitol hill: where one stands depends on where one sits. Your situation determines your point of view.
One key truth that everyone should keep in mind is that if the value contributed accelerates the creation of value, everyone should win. This should be true whether or not the contribution is advice, capital, the use of a facility or a technology license. The addition of an advisor to the mix, regardless of how compensated, can be optimal if the value derived from the advice exceeds the value forgone in exchange.
At the end of the day, the fair test is--and this should be easy to measure--whether or not the exchange of value is fair. For many such things, there are good market measures. For instance, the market for venture capital placement fees paid to agents (the world in which I work) is fairly well defined: fair fees range from five to six percent of capital raised plus one or two percent of shares, typically structured as warrants. For venture capitalists, the process of pricing the deal determines their return. They are entitled to high returns--very high returns--given the risk of investing (typically) in companies that are losing money--lots of money, relative to their revenues.
For the newly developing advisory capital market typical pricing and compensation structures haven't been developed. Some guidance as to the value of such advice might properly include some consideration given to the amount of time contributed. By way of example, in my business, occasionally we enter into informal agreements to simply facilitate an introduction. For such an arrangement we take a much smaller fee (about 80% lower) than when we are formally engaged to manage a private placement process.
Entrepreneurs engaging advisory capitalists should be cautious about ensuring that compensation matches contribution. Where possible and legally appropriate, consideration should be conditioned upon the realization of value.
By way of a brief bibliography, let me provide you with some of the links that I've used in preparing these thoughts. I should note that Tim Stay of Know More Media suggested that I weigh in on this topic. I agreed and now you have my thoughts. Here are some of the sources Tim and I reviewed:
- Umair Haque's post: The Rise of the Advisory Capitalists
- Stowe Boyd's post: Advisory Capital: A New Basis For Strategic Involvement
- Jeff Jarvis's post: The VC Olympics
- James McGovern's post: Thoughts on Advisory Capital
- Tom Evslin's post: Disrupting the Venture Capital Industry – Advisor Capitalists
- Hal Halladay's post: Unbundled Venture Capital
- Fred Wilson's post: Advisory Capital
There are doubtless many other posts on the topic, some of which I've read and haven't mentioned for no reason other than I didn't bookmark them properly when I did. You get the gist.
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