Edu: Advisory Boards - Getting Help, Credibility & Capital From Experts

Chris: Hey, I'm Chris.

Yaniv: I'm Yaniv, and in today's episode we're going to discuss the misunderstood topic of advisory boards. You may have heard about advisory boards, but you're not sure what they're all about. They can be great, but only if you know what you're doing and why you're doing it. Don't worry, we've got you covered.

In today's episode, Chris and I are going to explain what advisory boards are, what they're good for, who should be on it, and how to set one up. So without further ado, Chris, let's jump right in.

Chris: Yeah, absolutely. Yaniv. So the first thing to point out before we really dive into this is that there are actually different kinds of advisors and. They act quite differently. And so we're gonna talk about a very specific kind of advisor on an advisory board today.

There are advisors that are, more stateful or more involved in the details of your company, where you might be working with them multiple times a week, digging into the details. And they have long lived in the weeds relationship with what you're doing. that's more what I do, for example.

And those tend to be on a retainer of some kind. They're usually a mix of cash and stock, and they're really more like a fractional executive on your team. They're, part-time helping you out. And then there are more what I would call passive. advisors who are. Part of your advisory board, which is a topic we wanna discuss today.

And these would be sitting together in a informal group. so they wouldn't necessarily be connected to each other, but they're connected to you and their company. And, we wanna dig into, as Yaniv said, Why you might set one of these things up, how you might engage with these advisors and what it takes to operationalize one,

Yaniv: I think that's really valuable context, Chris. These two types of advisors, and I've definitely come across this before, So let's start with what these two types of advisors tend to have in common, which is that they are experienced in some sense. You know, you're not gonna get a smart kid from straight out of uni to be an advisor.

Generally, you pull in an advisor of any sort because they have experience and skills that you don't yet have, but if you get these two types of advisors confused, I've made this mistake. I've certainly had this mistake made with respect to me. then you're often going to be disappointed.

Right? So you're exactly right, Chris. These sort of stateful advisors, they need a lot of time with you, Remember, you are in your business day in, day out, day in, day out. If you want them to actually be able to give you advice that is contextual to the work that you're doing. And I think when you say stateful, Chris, that means they understand enough about your business to contextualize their advice relative to.

Where you're at with your startup if you want them to do that. They're going to need to spend a lot of time with you. And like you said, Chris, that's nearly more like a fractional executive. You're probably gonna have to pay them for that. the other sort of advisor, whether an advisory board or not to be frank, is someone who's quite light touch.

You might check in with them once a month, once a quarter, maybe a little bit more than that, but not a whole lot more. And they might have some really valuable experience, perspective and learnings. But they will not understand your business very well.

They simply won't. They won't have the time to, and so if you want them to give you really specific advice about like, what should I do? They're not going to be able to help you very much. You really need to understand what it is that you're gonna get out of them. And then you can really leverage their experience.

You often get one or two nuggets of extremely high value. They help you avoid potholes and wrong turns because they've been there before. But their advice will be more general in nature. and understanding the difference between the two is actually in my view, Chris, is the most important thing going into bringing on any type of advisor and especially an advisory board.

Chris: We've been using the word stateful. you might actually say that the first kind of advisor is what you might call an active advisor. they're more like a part-time member of your team and they're very engaged and involved week in and week out. And the other type of advisor you might think of as a passive advisor, as you said, Yaniv, you might talk to them once a month or once a quarter. as we've been saying, they're less stateful, they're less involved in the details and remembering what happened last time you talked. and as you said, also, they would help you with a, short, sharp perspective shift or maybe even an introduction.

And they're typically very, very senior and experienced. So that's the two different kinds of advisors.

Let's talk a little bit about what exactly is an advisory board I think the, word board is a little bit of a misnomer, right? a board of directors typically meets as a group and makes decisions as a group and holds you accountable as a group, whereas an advisory board tends to be more a series of individual relationships with a group of people.

So it's a board in the sense of. There's a group of them, but it's not a board in the sense that you meet with them as a group and they're asking you to report to them and hold you accountable as a group. and so it would be a series of individual experts as Yaniv touched on, who you gathered together to be a resource for your company.

And so then the question becomes, well, why do you pull these people together? and what are you hoping to get from them?

There are two main reasons why you put together an advisory board. The first reason, and the one that is most popularly understood, is to get help, right? So if you're building a marketplace business and you have not built a marketplace before, then having an advisor on your advisory board who's, let's say the former marketplace builder at Airbnb, or who ran marketplaces, adding advisory board.

And being able to lean on them for short, sharp, and timely advice can be very, very helpful. And so these are a group of people who are ostensibly there to help you cover off your blind spots and help you fast forward to the right answer with short, sharp, and opportunistic moments of advice, or introducing you to people in their network.

Who might be able to help you solve a particular problem. So the first reason you put together an advisory board is a collection of people who are helping you to solve key risks, key challenges in your business. The other reason, and this is not talked about as much I think, and is maybe a little bit cynical, is to be perceived to be doing that, right?

It's a form of signaling. So if you are building a marketplace business and you don't have marketplace experience, but maybe you've got good intuition, you've got good people on the team, broken the cold start problem, but still in your background, in your resume, you don't have any demonstrated experience in marketplaces.

Well, not only do you need the actual help, you also need to signal to investors, Hey, that person knows marketplaces. They believe in our attempts to create a marketplace. That's why they've signed on and I'm leaning on their expertise to help me build this marketplace. And so it is an actual form of help.

And it's also a form of signaling that you know how to build consensus, gather experts around you, and to cover off some of the risks or challenges of your business.

Yaniv: It's so interesting, like you could view the sort of the signaling thing as a cynical. Perspective, but signaling is something that happens in nature, that happens in biology, and it serves a very valuable purpose. Right? Because what you are saying by bringing on a particular advisor, let's say, an early product manager at Uber or someone amazing like that, is that they perceive there being enough value in your startup that they're willing to exchange their time and their reputation for.

Equity and potentially the reputational uplift from being associated with your startup. So that signaling there is them saying it's not just you know, a third party might say, oh, your startup is getting good advice from this person because they're really good, but that this person is interested enough and has enough faith in what you're doing in your startup to give them your time.

And in that way, It's quite similar to angel investors a lot of the time. I think I may have mentioned in a previous episode initially seems perverse this funny game of reverse bidding with angel investors. If you're an angel investor and you're talking to a startup and I say, oh, our minimum check size is $50,000 and you're an angel investor, and you say, that's too much for me.

I can only afford to put in $5,000 or $10,000. And they say, well, usually we wouldn't take such a small check. But for you. We will, because we'd like having you on our cap table. So you have this weird negotiation about how little money they're willing to take from you and basically you make up for that.

Because instead of cluttering up their cap table, you are seen as someone who enhances their cap table to say, I have got Chris Saad as an investor in my company. That is a good signal to others. And in the same way I've had Chris sad as an advisor on an advisory board. That is a good signal to others.

And so we are playing this game of signaling, and it's not that cynical. It is simply part of how it is. We are associating ourselves with each other.

Chris: So we've got a group of people where expecting to get short, sharp, clear advice and signaling from them what should you expect from them.

Yaniv: Okay. So that's the signaling piece, but now let's talk about the advice piece, because hopefully you can still get some advice outta these folks. So you have this advisory board, this group of people you've handpicked, as experts in their field.

Now, what can you expect from them and how can you best make use of your advisory board? From my point of view, going all the way back to this idea of light touch guidance what sort of advice is it best to seek from them and perhaps what sort of advice should you avoid asking for?

In my view, there are two or maybe two and a half categories of advice that a light touch or a passive advisor can give quite well. So the first one to one and a half categories, I guess are. this is what I did in the past. So you say, oh, we're considering, expanding to a new country.

we're just thinking about that. And the advisor can say, this is what we did and this is what worked for us. And then the other half is perhaps we tried these things and they didn't work for us. Important to note that this is really valuable context and you can understand their thinking.

You kind of get that experience, that speed run, but their business was different from yours in ways that they don't fully appreciate. Right. That's what we were talking about before. These people did not have a lot of state. So when you hear that advice, It is context for you to process as you see fit, right?

It is not saying this is what you should do, or this is what you shouldn't do. It's just saying, this is what we did. This is what worked for us, and then you really need to do quite a lot of the work at your end to interpret that information and see how it applies to your context, because that will not be done for you by the advisor.

The other category that I think can be a little bit more direct and definitive is, This is probably a bad idea, Like sometimes you're about to do something and an advisor who's been there knows is just a giant landmine that's buried there, and they can say, look, your mileage may vary, but what you're doing is probably a really bad idea.

The unit economics don't stack up like we did something like this, we had the same blind spots as you, which are A, B, and C. And those blind spots mean that your idea is very likely to fail. so it's interesting, right? I don't think they can ever give affirmative advice because of course there are many more ways to fail than there are to succeed.

And these people will not have the context to tell you how to succeed. But they can sometimes say, okay, you there'll be dragons, they've buried landmines, there's a cliff. just don't go there. And remember, they're just giving you advice. They're not giving you instructions. It can be valuable though, to heeded that advice and really think about whether it is applicable in your case.

Chris: Yeah. I think the other category where they. Helpful is in introductions, right? So, oh, you're working on that thing. credit cards or credit card fraud. And so you should really talk to John Smith over at whatever he knows, credit card fraud inside out, or, Hey, you should really hire Sally.

She was incredible from me over at, you know, Canva. and so they can help you kind of fast forward introductions to their network and, their own experts.

Yaniv: Absolutely.

Chris: And so that covers off, the two kinds of different advisors that exist, these active and passive advisors, and an advisory board is a group of passive advisors that are experts. Help you avoid these. Obvious cliffs and landmines. it's good for getting actual advice even though the advice may not be uniquely tailored to your business and it's good for signaling right.

John Doe and Sally Smith believe in my company they're experts in the field and so, this is a good signal about our, startup I clearly have the right people around me and I know how to recruit these people.

And then you should really expect this kind of generalized advice. Here's what worked for us and here's what didn't work for us. Question then becomes, Who exactly should you add to your advisory board? And, we've touched on this a little bit, but let's go into it in a bit more depth. So let's say for the sake of argument, you're building a startup that involves managing lots and lots of data.

It's a marketplace of some kind, and it's gonna involve a lot of credit card transactions, and maybe even subsidies. So it's, Dropbox esque, and maybe you've never built a startup before or you've built a startup advantages, large data before, but you haven't dealt with marketplaces and you haven't dealt with transactions and credit cards.

Well, the best kind of advisory board covers off these blind spots in the founders. And so you might say, Hey, I'm an expert in managing large data sets. I come from Dropbox, or I come from, you know, Google Cloud, but marketplaces, I clearly have nothing in my background about this.

And so I've recruited to my advisory board, the head of marketplaces at Airbnb, or Andrew Hanover at Andreessen Horowitz. He's an expert at marketplaces, and he's on my advisory board. And so as an investor, as anybody who's betting on your company, oh, Not only are you aware of your blind spots, you have hired a specific set of people to cover off on those blind spots, and I should be more, clear here.

Not necessarily just blind spots, but the key challenges or points of risk in the business. You're building a data management business with network effects, with lots of credit card transactions. Well, I have an advisor for each of those big risks and each of those big pillars. And so that's a really, really great way.

and also a, big part of our business is gonna be breaking into the Southeast Asia market for the sake of argument. And I've hired someone who grew Southeast Asia for Uber, they know the Southeast Asian market really, really well. Fantastic. Now I have a four person advisory board covering off those key opportunities, challenges, and risks in my business.

And so that's how I think about it. It's a bit of a puzzle where you're trying to paint by numbers, fill in the key people to smooth out the journey and de-risk parts of the business for you.

Yaniv: And again, I think going back to what you were saying before, there's the advice and the signaling side of things, and while they generally pull in the same direction, it's worth also thinking what is the story I'm trying to tell? Tell with my advisory board what is the signal I'm trying to send? And you know, one way of perhaps informing that is, if you have been pitching to investors or whatnot and been getting pushback in certain ways, saying, oh, you know, we're a bit worried you don't have experience in this and that, Fill up your advisory board so that next time you put their faces up on the deck and that gives those investors more reassurance. I think a, very common example right now, in 2023 as we record this, is ai. you might have a bit of AI thrown in there and an investor, because I get the stuff pitched to me and I'm like, okay, here's another AI pitch.

What makes you particularly. Competent at using AI to solve this problem when this gold rush is happening, one thing that can give me some reassurance is if you have managed to convince a real luminary in the field of AI to be on your advisory board, again, a, as an investor, I get the confidence that they can give you some advice, some connections.

B, the signaling is luminary in the AI space, thinks that this thing is valuable and therefore, That de-risks it for me as an investor. So again, think about the narrative. Think about the fact that what you're getting from an advisor is their advice, but also the signal that they're saying, I am willing to associate myself with and give my time to this particular product.

I wouldn't be doing that if I didn't think it was interesting and that this team is capable of delivering against it.

Chris: I think there's actually a third bit of signal here, right? As an investor, I'm feeling like a, this person knows their blind spots. And, has covered them off. There's someone here who can help them out. B luminary believes enough in this company that they're putting their reputation, their time on the line, and C, this founder knows how to recruit people to their vision and knows how to build coalitions and consensus.

There's that third signal for me as an investor, right? Like, this guy knows how to get. Stuff done or girl, right? And so that's, a really interesting part of the storytelling as well.

Yaniv: That's right.

Chris: So I think you're at this point, hopefully thoroughly convinced of. Meeting an advisory board, or at least why you might need one and, who you might put on the advisory board.

But the question then becomes, okay, well then how do I go about constructing one of these? How do I go about pulling together this group of individual advisors? And so the first step to doing this is actually very analogous to raising capital. You need to have a process of. Approaching these people either directly or through warm introductions and pitching them on the business, walking them through what you're working on, why it's a real problem, why you're the person to solve it, and why they might be uniquely qualified to help you and why they should spend some of their time, if not their capital, on coming along for that journey.

Yaniv: This is a lot like recruiting and it's also a lot like capital raising. All of these are exercises in getting introduced to the right people and then getting those people's attention. So leverage a network, get those introductions.

Have a c r M of people who you, think you would actually like to have on your advisory board. Aim a bit high and then get those intros. Perfect your pitch. and that's really what it's about. Right? Say, Hey, I want you on my board. We are building something amazing. I think you can flatter people a bit as well.

You can appeal to their egos, but you know, you really wanna create this sense of excitement and FOMO around your startup. Exactly. In the same way as investors. And, here's a way of thinking about this, right? Any investor is going to have a limited supply of capital that they need to allocate, and they're gonna allocate it to the things that they think can be really big, that are really exciting to them.

An advisor, nearly by definition, It's going to be time poor. Their capital is their time. You are asking them to give you their time and their attention, and you need to pitch for that so that they feel confident and excited about making an allocation of their precious time and attention to you. So in that way, it is really, really similar to raising capital.

Chris: Yeah, the thing you said Yev, that really resonated with me and I was, about to say, it's like the thing I wanted to say and then you said, the very words, which was Aim High. Right. advisory board of No Name people

it's just not that interesting. but the former head of marketplaces at Airbnb, or the former head of marketplace growth for Airbnb, Asia Pacific at least, is much more interesting, right? It's the combination of their name and the company or achievement. They helped to run or drive or be participating in.

Aiming high, I think is really important. you've probably heard me on this show a few times, speak a little bit derisively or, skeptically about academics

Yaniv: Nearly every episode,

Chris: Yeah, you, you don't want, like the head of marketplace theory at University of Queensland.

you want someone who has built and run high performance, high scale marketplaces, right? and pitching. Is the other key idea. You really pulling out all the stops and, drawing attention and fomo, as you said, Yaniv to what you're doing and why you and your company are the place to, spend their time.

There's a dimension of interest there, like, why is this interesting for me to work on? And there's a dimension of payoff, right? Okay, if I'm gonna get some equity in this thing, is it gonna really, at the end of the day, affect my bottom line? And so they need to pick the places they spend their time very carefully.

Yaniv: Now Chris, you picked on academics, which you like to do. but I think, we're talking about aiming high. I wanna come back to that signaling thing because the more I think about it, the more power it has, right? Which is to say when you're putting your advisory board together, it will send out a signal.

 Often you're gonna be signaling to. Investors, potential future investors. If you're in the enterprise space, you may be signaling to potential customers and so on.

So you actually want to be thinking, okay, what is the signal I wanna put out there? And, Chris, I think we both have a bias to say, well, what you want is experienced startup operators. there are times when you might want an academic to say they're validating the science behind what we're doing.

I think another very common go-to is to get advisors with big names in corporate, right? We've got someone who is the head of compliance at your country's second biggest bank. Now, in general, I look at that and, I come with the same kind of somewhat cynical response to you Chris, which is like, well, they think that's a big name, but.

It's actually someone who doesn't really know much about how to build or run a startup. So their advice isn't going to be very valuable, but there are times when the signaling value of having a particular type of person is going to be valuable. And so you need consider, okay, what is my advisory board for?

And what sorts of people on that board will provide that sort of reassurance that we need to the audience or the constituency that we are trying to comfort with the existence of this board.

Chris: This really connects back to the point that I was making, which is. If you think of your advisory board, almost like series of slots or paint by number boxes or a puzzle, right? The question is why are you slotting that person into that place? And so if you are trying to cover off the business risk or the weakness in your resume around safety, security, banking, and you are proposing in your strategy to create relationships with banks, Then the head of banking at your second largest bank is exactly the right person for that slot.

But if you're trying to cover off, Hey, we know how to do credit card transactions and fraud at scale. Then the head of banking at whatever bank is pointless. It's the head of transactions, fraud and risk at Uber is the guy you want because they know how to build, high-paced Silicon Valley style companies at scale.

Similarly, I'm always down on academics. If you are trying to build an ed tech company and the slot you're trying to fill is, Hey, we know how to build educational content, and we need help with pedagogy. Well, the slot we filled with that is the head of pedagogy at Queensland Education or head of pedagogy at like California Board of Education.

Right? is really about understanding the slot and the signal you're trying to send. so in some cases that might be, big co people or academics, contrary to Yaniv.

Yaniv: So, Chris, do we pay people on our advisory board?

Chris: No. No. So, as we, there are multiple kinds of advisors, right? There is active advisor involved. Multiple times a week is very stateful and then dedicating a lot of time. Those are like part-time employees. You might pay them a mix of cash and stock. there are angel investors, as you've alluded to, Yanev, where they actually are buying some of your equity and they're gonna give you some advice as well.

But pure passive advisors on an advisory board. You don't pay them, you put them typically on what's called a standard fast agreement, F a s T. you can make up the agreement all you like, but there is a standard template agreement called A Fast that was authored and standardized by the Founder Institute by oday O Risi over there. He is a friend of mine, and that's become pretty much the industry standard agreement that most advisors sign up to. It also helps you understand what you should expect from the advisor in terms of time, introductions, and helps you calculate.

How much equity you would give them based on the time they're gonna give you their level of expertise and the maturity of your company. So it even helps you solve for the question of how much equity should this advisor be paid and under what conditions?

Yaniv: That's right. whether or not you use a fast, I think there's a very. Strong convention that advisors are paid in equity, and as with employees, they should be on some sort of vesting schedule. sometimes a vesting schedule is shorter, but you don't wanna just give away all the equity upfront and then not get any value from the advisors.

So standard protections should be put in place. if an advisor insists on being paid, probably that is a red flag, you might forgive them for maybe just not knowing the norms, right? They are giving you their time. After all, they might think they should be paid for it. But, you know, especially given that a startup has precious that they need to put towards building and executing on their product and vision, these are experienced folks.

The convention is not to pay them. Instead you give them equity so that they are aligned with the long-term success of your startup.

So there's one final thing that put in here that I thought would be interesting to discuss, Chris, and maybe slightly controversial, I don't know, which is really about advisory boards versus angel investors. and as I've already alluded to in this episode, I think there is a huge amount of overlap.

Both advisory boards and angel investors tend to be people who can provide extra value, who can effectively. Help take your business to the next level and they're rewarded because they hold equity in your business. Right? That's true of both advisors and angel investors. and by the way, I should clarify.

You know, I think the term angel investor has been bastardized or corrupted a bit to kind of mean any private investor who puts in a check at an early stage. But angel investors really are supposed to be these value add investors, right? These are people who come in early and they help. With your startup, they're exited founders or, you know, experienced startup execs or whatever who have enough means to put in a bit of money, but also, have the experience to actually help you along the way.

And that's one way that they maximize the return on their investment, is that they're not just passive investors, they're investors who help their investments succeed. Now, in general, I think maybe this is the controversial bit is I would say, If you can get angel investors who fit into those slots, Chris, that you're talking about, rather than advisors, then you're better off doing that.

And there's two reasons for that. One is very obvious, which is instead of giving away equity just for advice, you're getting money in return for the equity and the advice kind of comes for free. So in some sense it's just a better deal for you as a startup also because of that. The signaling is often stronger that these people are putting real skin in the game

There's something about people putting their own money into something that is a really strong vote of confidence that projects a stronger signal. The times to go for advisory boards is a, if for whatever reason, and there are a lot of reasons you may not be able to attract that type of angel investor.

You should go for an advisory board, and b is around diversity. the best. Person for a particular slot, for a particular advisory slot may simply not have the means to invest cash into your business. And again, even then, I alluded to this earlier, that's why you played this weird reverse negotiation game, which is like, how little money are you willing to accept, from that angel investor? So I would say all other things being equal. If you have the clout to attract a high caliber person that can fit into that slot as an angel investor rather than simply as an advisor, you're better off doing that. That's why I think you quite often see startups that don't have advisory boards because effectively their early angels are their advisory board.

Chris: Yeah, that's right. I think it comes down. To how strong you are as a founder and how strong your company is in terms of momentum and FOMO and opportunity size. And the very best founders Maybe have one or under their be come from, the right pedigree with right kind of traction. They will absolutely be a lot more bullish and they'll be, taking the position that. We're looking for angel investors

But if you are not, X this and X that and former A, B, C, and you are on your first startup and you haven't demonstrated traction, then you take what you can take, and you try to get the best deal that you can. And I do think advisory boards are a. A lack of experience and pedigree founders, That you don't completely, but at least you partially compensate for that lack of pedigree, that lack of experience. If you have the pedigree, but you're just trying to round out the team and round out the story, then you would skip the advisory step and go get capital from Angels and have them be part of the, network of advice and support you have around your company.

Yaniv: All right, Chris. Well, that was a fun one. I hope we've demystified a bunch of things about advisory boards. They are actually very mysterious. I remember. Early on in my startup journey, looking into advisory boards and walking away quite confused about what they're for, when they should get one, and so on.

So I hope we've provided you some valuable context that will help you putting together your advisory board if you need one. And we were talking about lightweight advisors versus more active advisors and lightweight advisors can be quite useful, but sometimes there is just no substitute for a high context, high state advisor who can come in and really help you solve problems that are unique to your business.

And if you're thinking, that sounds like something I need, well, as someone right here on this show, who provides that type of advice? Chris, if folks wanna work with you, what do they need to do?

Chris: That's right. I am one of those active advisors we talked about where really more like a part-time employee in the weeds week to week with my startups.

And, I have carved out part of my data work with companies in this way. So if you'd like to learn more about that, feel free to visit chris sa.com/advisory and learn more about it there.

And don't forget, guys, if you've listened to a few episodes and loved the stuff we talk about on The Startup Podcast, you've signed up to The Startup Podcast Pact, which asks you to please rate and review us in your favorite podcast app. Follow us on YouTube and spread the word on your favorite social network. It helps grow the show and helps us help more founders, which is ultimately the name of the game, right? So thanks for listening and thanks for honoring the Pact and Yaniv, thanks for joining me on another awesome show.

Catch you in the next one.

Yaniv: It was a pleasure, Chris. See you next week.