Fred Wilson has commented on a post by Stowe Boyd on Advisory Capital. It's a great post and there seem to be a lot of comments by people who do what Stowe does but have never called it "Advisory Capital". While I applaud Stowe for eloquently describing something he calls "Advisory Capital," the truth is that this is exactly what Venture Capitalists do and have been doing for quite some time. I often help out companies for equity without putting in cash. I like to refer to this model as the "Venture Capitalist Who Has No Money". After all, without capital to invest, how can you gain equity? You must provide something of value and that happens to be advice and connections.
There are a host of people in the business community that provide advice, guidance, or stewardship to companies of all sizes in exchange for equity. This can range from the venture capitalist, angel investor, token board member, service provider, contractor, family or friend. Basically, anybody that helps out a company that would normally get paid in cash can always opt to get paid in equity. When the climate for new issues and startup companies is hot, everybody jumps on this bandwagon and would rather get paid in equity. Down the road, when the tide turns, nobody wants stock, everybody wants cash.
Can the VC who does invest money provide "Advisory Capital"? A VC who is involved at the earlier stages of a company has the opportunity to provide advice in exchange for equity. Many early stage VCs provide "Advisory Capital" through their incubation practices and their Entrepreneurs in Residence. When the deal is too small for the managed money pool, it is not uncommon for the GP to help a fledgling startup out in exchange for equity, then when the startup gains momentum, to come in with a chunk of managed money.
What about a middle stage or later-stage VC? How can he provide "Advisory Capital"? Well, when a company is more than just a fledgling startup, it is unusual to see "Advisory Capital" exchanged for equity. The reason that you don't see the doling out of equity at later stages of a company in exchange for advice is that at that stage there are people who are putting up hard cash for equity. It won't sit well with them if the company is giving out equity at the same time in exchange for "advisory services."
I submit that a VC who has invested money in the deal is also getting equity in exchange for his advice. When the venture cycle is down, most good VCs will provide advice, guidance, and expertise rather than more capital. If a VC has invested in a company and at some point is giving advice, then he is not just providing capital into the deal. He may not get separate equity for the "Advisory" Component of his role with the company, but it is very likely that he has driven a hard bargain on valuation and that in some sense, the smaller valuation or "better deal" on his capital investment is his equity for his "Advisory Capital" After all, why would a startup allow itself to be slighly undervalued in exchange for capital, unless that VC is providing more than capital?!?
Will Advisory Capital be the new model of Venture Capital? Will Advisory Capital replace traditional Venture Capital? I agree with Fred that you must have "skin in the game" and hard cash in the game to really be a part of the venture. However, I submit that a good Venture Capitalist will provide whatever needed to help his company grow and thrive. In the early stages, this may be advice or guidance, in the later stages this may be capital only. Call it "Advisory Capital" or "Venture Capital" or whatever you want, the bottom line is that this person is helping a company succeed and is getting equity or a better deal on his equity investment for doing so.
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