Your new business may be nothing more than an idea scribbled on a cocktail napkin, or it may not be written down at all. Believe it or not, you should already be thinking about creating an advisory board, or at least a group of informal advisors, to help lead you to success.
"I think it's insane for a start-up not to have an advisory board, no matter what industry it's in, and no matter what stage it's at!" declares Peter N. Townshend, partner at Perkins Coie. Many entrepreneurs think they should wait until a company is established before creating an advisory board--but that's a mistake, he says. Even at the earliest stage, inviting someone to counsel you or help you brainstorm your ideas can help you get where you're going more quickly, he says.
And there's very little down side. "Private companies that are pre-funding, or have been through one or two rounds of funding rarely give cash compensation to their advisors," he says. "It's always equity, usually stock options. So really, the only requirement is to adopt the stock option plan correctly."
On the other hand, there's a lot of upside. Here are five good examples of what an advisory board can offer:
1. Help refining a product idea or business plan.
"Every entrepreneur needs to refine his or her concept or business plan," Townshend says. Advisors are likely to have greater industry expertise, and a better sense of what will and won't work in the market.
2. Access to capital.
"I've seen it happen again and again where all a company does is get an advisor interested in what they're doing, and then that advisor is off and meeting people and talking about the company," Townshend says. "It's not really planned, it's just a matter of letting them know what you're doing and getting them excited. They'll become advocates for your company, and that will help you find investors."
There are regulations restricting an advisor from soliciting investments, he adds. "But advisors are great at providing introductions."
3. Competitive insight.
"A lot of entrepreneurs fail early at finding funding because they don't know enough about their company's potential competitors," Townshend says. "Or worse, they do the classic dumb thing which is to claim that they don't have any competitors."
Advisors can help you gain a better view of the marketplace and see what companies yours will wind up competing with. "They can ask the really hard questions," Townshend says.
4. Key partnerships.
"A lot of companies start with their advisors when they're looking for a service provider, or to do some sort of joint venture," Townshend says. "For companies where collaborations are critical, a really well-connected advisor can be a huge benefit."
An advisor can also provide introductions to key customers for a B2B venture. And contacts that will help later on if you decide you want to sell the business.
If you haven't yet brought your product to market or your company is largely unknown, one of the fastest ways to prove you're for real is to get a luminary in your industry onto your board of advisors. But it's important to find the right balance, Townshend cautions.
"Some people go to academia and they get a Nobel laureate on their advisory board," he says. "They may only meet with him or her once or twice. But you need to be careful because if a potential investor calls and the Nobel laureate doesn't remember you, it can really backfire. Window dressing is important, but there has to be some substance behind it too."
At the same time, industry leaders probably don't want you bothering them with frequent requests for information or advice. "Think of having a balance between real luminaries and people who will help you a lot more," Townshend says. "You don't want all your advisors to be super-involved and helpful but not famous. Conversely you don't want them all to be people who are famous--but not available to help you."