As a kid growing up on Cape Cod it is hard not to spend at least 90% of the summer either swimming or sailing in Nantucket Sound (the remaining 10% was spent eating ice cream from Four Seas). So, yeah, I have lots of salty stories, yet one specific, very poignant flavor comes to mind whenever I feel troubled – the first time I got caught in an undertow (an undertow is a strong underwater current generated from waves crashing into the beach and water recoiling) at Sandy Neck beach in West Barnstable.
For those in the know, getting entangled (and that is what it feels like) in an undertow is frightening especially if you’re five-years old and holding onto your bathing suit with your toes as it gets ripped from your body (note to self, learn to tie a double knot). For those fortunate enough not to experience an undertow, well, just imagine being getting sucked out of an airplane at thirty thousand feet (I’m going for the vacuum effect, not the “splat” thing).
The first thing that floods into you mind is “weee” – the second thing is “crap” – the third thing is “mom” – and the fourth is “I wish I had something tethering me to the beach rather than being sucked out to sea (Regis, I’d like to use a life line).” At that moment of panic you don’t care what form the life line (or knight in white shining armor) looks like, where it comes from, or what you need to do to get it – all you want is to have it in hand.
I liken my undertow induced panic to that which some early stage start-ups experience during their early days, you know, before the model is proven and/or they’ve cobbled together a solid track record – a panic that sometimes results in the management team reaching out an advisor (or advisory team) for help. With this said, this panic isn’t reserved exclusively for start-ups, big, established companies do this too, but they call this “hiring a consultant” or “consultancy validation” (queue commercial for Bain).
Over the past year and half, I’ve seen at least five China based start-ups reach out to an advisor (or team) for help in validating the model or re-positioning of the business strategy or just to secure venture capital funding. At one point, I thought this was a great idea (and I still do); it makes lots of sense to find someone experienced and knowledgeable in the space you’re operating it – sort of like a road map or knowing the “code” for a secret gun or unlimited life in Tomb Raider (I’m old school). At the same time, being all panicky and stuff, forces bad decisions, or rather irrational decisions that make sense at the time (“dude, toss me that poison ivy vine, pull me up…”) but in hindsight you end up kicking yourself.
Recently, I learned of a Beijing based start-up (let’s call this company “Zing”) operating in a competitive space, yet with no clear market leader. Zing’s management team knew they had a solid business model, a quality team, and good momentum; even so Zing was nervous, worried that the echoes, or rumors of foreign competitors encroaching on their space would quickly materialize.
Complicating the issue was their inability to attract venture capital funding because: (1) the team’s experience only covered 50% of the knowledge investors thought they needed to make Zing a winner; and (2) while Zing had an impressive pipeline of potential, promising customers, very few heavyweights had signed up.
Queue knight in white shining armor.
Zing was introduced to an American based guy who had not only successfully built a similar company in the USA, but also took the company public on NASDAQ (valuation hit +US$3billion). The American advisor dazzled Zing with his domain knowledge, his track record, confidence, and most importantly marketability (“trust me, any vc in their right mind will toss you millions by having me as your advisor…oh, and by the way, I have a meeting with you competitor in 5 minutes, what do you want to?”).
Feeling the drag of the undertow, Zing’s management team signed up our American advisor, offering him flowers, camels, KTV and 3% of the company (“who’s your daddy?”). And, for a couple months after the advisory document was signed, the advisor did add value, re-shaping the business model, helping the team to refocus and avoid rookies mistakes he made, and yet, for all these operational trophies, venture capital money remained quite elusive – nine months, two week, and 5 hours after Zing brought the American on board.
So, what was the problem? Did the American advisor doop Zing? Over promised, under delivered? Pull the old fast one? No, that didn’t happen at all, in fact the American was absolutely upfront and forthright with Zing, if anything Zing fucked up; they got all hyped up, putting too much stock in this knight in white shining armor.
The fact is no one person can make your company work, not to mention attract venture capital funding. And while an advisor, especially an active advisor who has proven he/she can build companies and attract funding, adds a tremendous amount of value to a start-up, the young start-ups management must going into the relationship eyes wide open.
Here is a list of some things Zing’s management team should have thought about before handing over 3% of the company to the American advisor – and by the way, the answers to these questions should determine how much of the company the advisor should get:
1. Location: Where is the advisor based? If this person is not in China, then how often will he/she be in town? There is a lot of value in having your advisor in the same country (or 2 hours flight away) for those urgent, “dude, we have a meeting with a major client and would really like to have you on our side of the table…” If this guy isn’t in the same country then you might want to consider finding someone who is, and when this isn’t possible make sure you have an open line of communication readily accessible (Skype is great for this);
2. Activity Level: How active is he/she going to be? Are we talking 1 meeting a week, or a conference call once every quarter? Will communication be on an ad hoc basis (as need be) or will there specific times you can call on him/her (this isn’t a bad thing, sort of like “office hours”);
3. Milestones: Are there pre-determined milestone or goals that must be meet to trigger vesting rights? Maybe the Advisor receives half his compensation from at the start and the balance after the company wraps up its funding. What do you expect to accomplish from having the advisor on board? Who determines the milestones (hopefully not the advisor);
4. Resources: What does the advisor bring to the table? In the case of Zing, the advisor had a very solid network in the US (perhaps globally) but not in China; in fact, I bet Zing’s advisor overestimated his value (from an investor’s perspective). If you need a guy to come on board to help raise money, maybe it’s a good idea to meet his funding agents before you agree to an advisory relationship;
5. End Game: Outside of equity in your company, what is he/she looking for? This is very important consideration, especially in China where the market is hot and yet very few people outside of Asia have any exposure (or relationships) in China; the case might be the advisor is using your company as a beachhead to ramp up his/her China knowledge base (“…for the past 12 months I’ve been assisting a local company grow its business from ‘x’ to ‘y’…imagine what I can do for your company…”). To be honest, this isn’t a negative attribute, if the guy helps to grow the business and get your company to where you want it to be, then why shouldn’t the guy take credit for it – the point is to keep this in mind when dishing out compensation (mutually beneficial experience is cheaper than a one sided deal);
6. Investor Impression: How does it look to a potential investor that you need to bring in outside help isn’t the real issue here, however what some investors might have problems with is the amount of equity the advisor gets – make sure you can justify your advisor’s value add (this is why basing compensation on successfully reaching pre-determined milestones is so important).
7. Relevancy: So, like, dude, are you still CEO or actively involved in the company you took public or are you like, on the beach sipping apple martinis? Point being, technology moves quickly and while there is a lot of benefit in working with guys who have been their and done that, you’ll get a lot more value (network, exposure, investor attention) if your advisor is an acting, innovative CEO (or other C level manager) of a company in your space than a, well, a has been (“…like, 10 years ago, I was, like, the guy who build a stock trading engine using email based delivery system…”).
8. Life Expectancy: When does the damn advisory contract end? Is it indefinite? Is it reviewable every 6 months? You might find that you’ll get everything you need to know from your advisor after the first 6 months? However, my gut is that if this guy’s is worth his salt, he’ll continue to offer up lots of valuable insights and connections. I like to see a 1 year advisory lock (non-compete) with a 4 year extension that can be terminated by either side at the end of every quarter (allowing for quarterly vesting of equity options). The way I see, don’t be greedy or petty – fairly compensate those who do good work for you – karma thing, I guess.
9. Responsibility: End of the day, it is the management team’s responsibility to engage the advisor. Often, a team will sign-up an advisor and forget to actually use the person, or rather doesn’t understand how they want to use the advisor. I’ve seen this happen in two China based start-ups in the past month – and when things don’t go as the team expected (“We’re rich! We’re rich!”) the blame games starts – and the loser is the guy with furthest from the ball, the advisor, when in fact its not really his/her fault but the CEOs. Smack! The truths gotta hurt, dawg!
Anyhow, these are just a few things to consider when hooking up with an advisor. I’m sure there are variations to these nine points (and some might not even be applicable to your current situation) but I guess the point is, if you have to remember just one thing, well, it would have that not matter how powerful the undertow is it eventually subsides once it hits the surf line. Shaka Brah!