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Advisory Capitalists?

Posted on February 27, 2006

Stowe Boyd brought up an interesting notion of Advisory Capitalists (or ACs) last week and it had created a lot of stir with people on both sides of the coin chiming in to flush the idea out. One of the more interesting chime-ins was Fraser Kelton’s. Fraser brings up the idea that VCs could add advisory services to their offering as a happy medium to either VCs or ACs. I liked this idea enough to comment on Frraser’s piece. Here are my comments:

Another great piece of writing Fraser. Well done. I had commented on Fred’s [Fred Wilson] article in agreement that money (”skin in the game”) is important to the VC/entrepreneur relationship. However, I should have thought things through a bit more and I would like to think that if I had I would have come up with your argument. VCs could easily add some of these “advisory” services into their current offering mostly untilizing staff they already have. I think as the VC space becomes more competitive for deal flow you will see some of these advisory services enter into funding offerings.

Another intersting thing that advisory services could do is bring a tier 2 VCs to the top tier. There are some good tier 2 VCs that just don’t have the reputation or track record of people like DFJ simply because they are too new. If these firms began to add advisory services to their offering they may be able to break out of the tier 2 level sooner and compete with the big guys for deals potentially shaking up the landscape in a way that not only benefits the tier 2 VCs but also benefits entrepreneurs.

I think there are some very hands on VCs out there now already adding in advisory services without calling them by that name. When I think of these individuals and how they are able to get such great investments things start to make a lot of sense.

There are a lot of great hands on investors out there that are, in a sense, adding a lot of advising time in with their cash investment. I believe that most of the better VCs are doing this and it is why they are in the positions that they are. Entrepreneurs are getting smarter about capital all the time. They know that they need not only the cash but a partner that will stick with them for the long haul through the good times and the bad. As more and more entrepreneurs figure out that VC isn’t all about the money, more VCs with advisory capacity will appear but the guys that have been doing it all along will still have a good stronghold.

On a side note: It was mentioned that ACs alone would not have the capital to put up once an entrepreneur needed it. This is probably the case (depending on the AC of course) considering that they are only individuals while VCs have a lot of money raised from their Limited Partners to put to work. It was also noted that ACs may not want to part with their vaulable advice for such a small portion of the company. This is especially important considering that ACs would not have the cash to continually participate in subsequent funding rounds leaving their positions to get diluted even further.

Let’s also remember that the VCs are not bad guys. A lot of them are great guys who really want to help companies out. Yes, they are worried about losing investments but it should be noted that a lot of times they are managing money for foundations, non-profits, pension funds and college endowments so the more money they can make the more these institutions will be able to help people (and, of course, the more money they make for themselves as well).

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1 Comment so far
  1. Fraser February 28, 2006 12:05 am

    Nice additional thoughts to your comment.

    As cash becomes a commodity in the venture industry, competition emerges. How firms compete will be interesting to watch.

    As you point out in your comment, a lower tier VC could “climb the ladder” (or the appropriate analogy) by providing services that entrepreneurs attach considerable value to.

    I don’t know where this fits in any of the arguements, but someplace in the discussion I read a pointed comment stating that everyone discussing the value of ACs and how they should be paid with equity because they provide services that VCs can’t, were, well, ACs.

    [also, good for you for reminding people that VCs are not evil individuals].