Forming an advisory board; because nobody succeeds alone
During one of my deal-prospecting trips to Kenya, I met with two vibrant entrepreneurs beaming with enthusiasm about the company they had built from scratch, with no external equity nor debt. Their company maps out smallholder farmers and sources high value fruits and vegetables using SMS technology. They also process extra virgin avocado oil! Given that these engineering graduates are sons of ordinary smallholder farmers themselves, I was very eager to learn more and possibly be their first investor. However, it didn’t take long for me to realize that despite the passion for their craft, they lacked the finesse that many investors would like to see. They didn’t speak the investor language, and were too engrossed in executing their day-to-day tasks at the expense of the bigger picture strategic goals.
Being an investor, I offered to advise them on various matters, first of which was designing and constituting an Advisory Board. As I did my research, I decided to share fundamental findings in a concise note because other entreprenuers may be in the same boat. So here goes:
What is an advisory board?
An advisory board is a group of people selected to advise and help a startup succeed. Its main aim is to fill knowledge and network gaps within the company. The advisors can be specialists in a particular field (such as horticulture) or generalists who can advise on broader challenges (such as experienced entrepreneurs). Unlike the board of directors, an advisory board is not a formal legal entity and does not control the startup. Instead, the advisory board provides strategic advice, experience, connections and legitimacy to the startup. Moreover, it is an excellent way to work closely people who are potential future investors and board of directors.
Some of positions that could constitute an advisory board are following: industry advisor for domain expertise; sales advisor for market tactics and demand creation; legal advisor for complex corporate legal issues; financial advisor for fundraising and financing advice, among others.
Why an advisory board?
An advisory board is a driver of startup success. The Startup Genome conducted an in-depth research to understand what makes startups successful. They generated the graph below that shows amount of funding raised by startups at different stages. The startups are split based on whether they have advisors or not.
As shown in the plot, startups with no advisors raise very little money and there are no scaled startups that raised money with no helpful mentors.
The report concluded that startups that find helpful mentors (advisors) seem to be more significantly more successful (raise 7x more money).
How does a startup form an advisory board?
These are four major steps in forming an advisory board:
Identify the knowledge and network gaps in the startup that need to be filled. Look inwards and identify the expertise and connections that you need. For the knowledge gaps, evaluate your growth plan to pinpoint the skills that would add great value to your company but you cannot afford to hire. These are expertise that you can access through an advisory board. For the network gaps, establish the connections that you will need to increase sales or scale your startup. An introduction by an advisory member may make that connection happen.
Use your networks to identify the potential advisors. Based on the gaps you identified, seek introductions to the potential advisors through your network. Otherwise, contact them yourself by whichever means you have access too.
Have an assessment period where you evaluate the potential advisors’ fit for the advisory board positions. More importantly, assess how interested and vested they are in your startup. Work together with a potential advisor on a problem or a project to evaluate their skills, breadth of network, working style and interest in your startup.
Once it is clear that you want to move forward with them, invite them to join your board of advisors. Be sure to have a formal agreement with details of their responsibilities and compensations, and your expectations of them.
What is in an advisory board agreement?
An advisory board agreement stipulates expectations, responsibilities, compensation, among other details. Seek a lawyer’s guidance in formulating this document. Some of the factors to consider are:
1. Meeting frequency: These could be regular (monthly; quarterly; or bi-annual) or whenever they are needed. Discuss the logistics beforehand in order to have clear expectations. Regular meetings on one-on-one basis with advisory board members may be more effective than a general board meeting.
2. Tenure: Term limits for advisor contracts could be annual or last a few years and are typically renewable when the advisory contract expires. As the needs of the company change over time, you may need to change the composition of your advisory board.
3. Compensation: This is important in 1) aligning incentives of the startup with the advisors, and 2) making the entreprenuers more disciplined about the caliber of advice and support you are seeking from advisors. The standard compensation for advisors is stock in the range of 0.25% — 2%. The amount depends on the value that they add to the company (in terms of their skills and network), their commitment to the company, the length of contract etc. The stock can be vested over the term of the contract. You may also consider reimbursing your advisory board members for expenses incurred while doing their advisory duties. In addition, consider other forms of value you can give your advisors, such as industry insights.
Conclusion
Forming an advisory board is more of an art than it is a science. As the business continues to grow and its needs evolve, it is important to continuously assess the value of each board member, and shuffle when necessary. A competent and dedicated advisory board could be all it takes for a company to earn itself a spot as an industry leader.