Start-ups are like infants and they require a considerable amount of care, especially during the first few years, subsequent to inception. Given that majority of the startups are founded by first time entrepreneur they do not have understanding and experience of all aspects of running a business. In this context advisors assume significant importance in terms of the
invaluable advice they can extend to start-ups in this growth phase.
Understanding the Advisor’s Edge to the startup. It is to be noted that most of the founders tend to assume that their conviction, hard work and commitment are sufficient recipe to make the business successful, while these aspects are
critical but they cannot be a substitute for the invaluable experience and network which the
advisors can bring on board.
When a start-up is incorporated it is highly unlikely that the founder(s) have expertise in all the areas of operation (viz. Strategy, Finance, Marketing, Human Resources, Business Networking), thus it becomes critical to select advisors who can provide advice to the founders in all these areas. Let us look at some of the areas in detail:
Company Foundation, Finance, Compliance and Funding Majority of Start-ups being new to business are not fully cognizant of the ground reality and are faced with numerous question of both strategic and operational nature, through the initial
few years of the creating and running a company. Issues like company formation (LLP,Private Limited, one-person company), Shareholding structure and agreements, Compliances (GST, TDS, Director’s appointment), Business engagement process and agreements, Funding structure, Dilution plan, Business Review and MIS, Valuation process amongst others. These system and processes are a critical part and a startup cannot afford to go wrong on any aspect
of business as it is might affect the future growth prospects of the business.Go to Market Strategy, Marketing and Networking Ability to build a product and market it effectively is distinct skill sets. In age of *tech based startups, founders typically are able to create a prototype and even generate initial traction, however building a scalable and process driven organization requires proven strategies and best practices where experience of advisors proves invaluable. Advisors typically have a strong network that they can leverage to help the start-up garner business, thus adding considerable value. Additionally, their experience of having a holistic view of business and finance helps to create strategies which can the startup work towards achieving strong performance metrics.
Human Resources: A start-up’s work culture is such that it is very demanding and intense and thus it may experience high labour attrition rates. In such a scenario, the start-up can benefit immensely from the expertise of advisors who by virtue of their past experiences indeed have HR experience. Their experience of handling various aspects of business and ability to identify and attract key people can play a key role in building a compassionate yet performance- oriented culture at a start-up.
Trust: The most critical ingredient for real Magic.
Last but certainly not the least trust is an extremely important ingredient of the relationship between the start-up and its advisors. One of the key to look for an appropriate advisor is just
like one’d look for a co-founder who can potentially compensates for a weakness the founders/cofounders might have. The way each of the cofounders must trust and respect each other, the same goes for relationship with advisors. While the relationship is definitely predicated on pecuniary factors, non-pecuniary factors are equally critical. In this context, the
start-up’s founders and its advisors must mutually trust one another. E.g. many start-ups come up with products whose source is secretive, thus in such cases the advisors should not divulge its sources to potential competitors. More importantly, the start-up should trust the advisors in such cases. If there is no trust, there is no basis for the relationship between start-
ups and advisors.
Taking care of Interest of Advisors: Compensation Model
It is imperative that the start-up comes up with a compensation package that is a win-win deal for the start-up and the advisor i.e. there is alignment of business objectives as well as advisors get adequately rewarded for the association. One must understand that advisors are senior professionals who have significant corporate and business exposure and hence hiring them as per the market value is not a practical solution and at the same time typically the advisors are looking at a meaningful association and want to add value to the startup. One means of compensation is pure equity wherein the
start-up founder parts with a fraction of the equity to the advisor. Equity model works really well as there is complete alignment towards growing the company and hence the valuation of the company, thereby benefitting all the equity holders.
Start-ups who are able to generate positive cashflows can consider paying a portion of compensation as fixed monthly or yearly components along with equity share. The advantage here could be a lower level of equity allocation to the advisors. Such dilemmas have to be faced by start-ups when devising ways and means of compensating its advisors & founders.
Alignment of Duration for the formative stages
Business is a long-run game and therefore the lengthier the association the greater the chance to build a working relationship. It could be a good start to go for a 3-5 year agreements and then renew it mutually as per the requirement and business status towards the end of such term. It is pivotal that start-ups and their advisors engage with each other constantly and consistently over time. Research and intuition show that repeated interactions can help in
building confidence and mutual self-respect over time. Such positive outcomes will clearly help the start-up experience growth over the long-run.
Getting the Most out of your Advisors
While there are so many ways to leverage a business advisor, the onus of getting the best out of them lie with the founders/cofounders. The founding team must be organized, having its information and financials ready, and ensure regular communication on the status and any issues that have arisen along the way. Being responsive, forthright, and transparent always helps the advisors to provide the best possible advice and direction which can help to get the competitive advantage the startup wants to achieve.
In Nutshell key to the success of any firm is its ability to judiciously use its financial and human resources. Start-ups are no different and its advisors & founders can play a key role in facilitating this process.