Startups tend to be seen as glamorous but they actually involve a lot of hard work; founders often hone their product in obscurity for years before getting any traction.
Perhaps there is a survivorship bias issue at play, since we only hear about the winners.
And when there’s this much money and attention sloshing around, lots of people want in on the action. Some people want to sell picks to the miners; others want to steal the miners’ claims. Once a service like Pitchbook has news of a startup raising money or there is news of a startup joining an accelerator, the game’s afoot. Everyone wants a piece of the pie and advice is the easiest entry point.
Of course, there is good advice and there is bad advice. But what distinguishes the good from the bad, and how can startups ensure that they get the best?
What good advice looks like
It’s helpful to create a solid framework to try to define whether something can be considered good advice for your startup.
Every startup is different. It has a different context in terms of the market it serves, the team it has assembled, its geography, and its moment in time. Good advice is advice that is tailor-made and well-suited for this particular company.
For example, advice given to a startup in the year 2000 would have been wildly inappropriate in 2002, for a startup that finds itself on the other side of the funding bubble. After angel and venture capital funding dried up while investors rebuilt financial capital lost on prior investments in public and private markets, we might expect that advice shifted from “burn cash to grow as quickly as possible” to “focus on free cash flow-driven growth and think like a bootstrapper.”
The advice that we would give a business-serving consumers (like one of the many mattress startups) would be different from the counsel we might give a business selling enterprise software-as-a-service.
We wouldn’t want to give the same instructions to a company at the Seed Stage as we would a company that was pre-IPO. Relevant advice is specific to the situation, not general in nature.
We need to be equally skeptical of the person who has had tremendous success. Just because someone got the payout doesn’t mean they know what they’re doing or that they can articulate what they did right and what they did wrong.
Counter intuitively, someone who failed and who has been introspective about why they got the outcome they did might be the best person to coach you.
- At Risk.
There is an intuitive difference between an advisor who has what author Nassim Taleb calls “skin-in-the-game” and one who does not.
This term refers to “having a measurable risk when taking a major decision.”
The person dispensing wisdom for the startup to act upon has the potential for gain and the potential for loss depending on how suitable the advice.
Advisory boards of people with deep experience either related to starting a new venture or to the specific vertical category, in which the startup plays, can help the founder access judgment in ways that avoid costly mistakes.
These boards are typically compensated with a small amount of equity, but the advisors attach their reputations to the success or failure of the startup. Reputational risk is sometimes the best skin-in-the-game.
On the other hand, if the startup is paying someone for advisory services and the payment is for a fixed sum, independent of the outcome, delivered in a manner that obscures the consultant’s engagement, we have the opposite of “skin-in-the-game.”
A truly cynical consultant would recycle their recommendations with as many potential buyers as possible to keep their costs down. Caveat emptor.
Much of what passes for advice is so general as to verge on meaningless. Consider this article from Inc. Magazine, chock full of aphorisms.
“While most of these commonly-dispensed tips are wise to follow, not all of them are actually effective. In fact, some will ultimately steer you and your new business in the wrong direction,” it says.Here are some commonly dispensed items of general advice to which they refer:
- “Ignore your emotions”
- “Get outside funding”
- “Focus on the product first”
- “Automate everything”
- “Keep your team lean”
- “Say ‘yes’ to every opportunity”
- “Stay the course”
Some of them are obviously wrong. But this is the kind of stuff entrepreneurs will hear.
Much of this information relates to “leadership” and to “culture,” both of which are so widely misunderstood as to make acting on this kind of generic advice genuinely dangerous.
The best kind of advice falls into one of two categories: how to mitigate the risk of failure and how to succeed at scale.
With the former type, the logic may be as simple as avoid failure and persist and success will inevitably come, assuming you have the staying power to await its arrival.
The latter type is about swinging for the fences on a big opportunity where you can create and grasp product-market fit, at which point you can figure out how to make it sustainable and scalable.
Both approaches have their virtues. A combination of the two in some sort of reasonable balance, tailored for the personality of the initial team and the target marketplace, usually makes the most sense.
So, how do you get that good advice?
Turning to our original question of how to find and solicit good advice, there is no easy answer. First, we must know what good advice is to different companies, teams and leaders. Second, we need to find people with the experience (and the consequent judgment) to be able to dispense it. Third, we need to convince them to give it to us. Fourth, we must ensure that whoever is giving us this counsel has something at risk, either financially or reputationally.
This ultimately is a sales function. We have to identify the sources of opportunity and convince the people who have this value to exchange it with us, as founders, for something significant in return. Ideally, they end up making some money on the stock they earn.
Here then is the irony of good advice. To obtain it, we need the judgment to know what it is and the ability to sell others on the idea of sharing it with us. To be able to get good advice, we may not need it, in the sense that we likely have the answers ourselves having learned through hard knocks what bad advice looks like. As Hegel wrote, “The owl of Minerva spreads its wings only with the coming of the dusk.” Minerva is the Goddess of Wisdom and she only reveals herself at the end of the day when we could have used her most in the morning. Truer words were never spoken.
Find people you can trust. Be skeptical. Look for people who have experienced both success and failure with context that is similar to your own. Compensate them somehow, either with cash, equity, or reputational upside. And experiment.
This is the sixth of a series of articles about startups and venture capital, where we’ll explain some of the concepts people might see discussed in the press. We’ll talk about how VCs decide on whether to invest and at what price in an upcoming article. We’d love to hear your feedback.