Most venture capitalists and angels will tell you that the hands-on mentorship and support they provide their portfolio companies is as important as—or more important than—the capital they invest. At one level this focus on non-monetary involvement is slightly self-promotional, a way for a firm or investor to distinguish itself from its many peers (money is money, but advice and connections are unique and therefore can be a USP in a way that capital alone cannot). But generally speaking the investors are right, and for many entrepreneurs the operational support that a few experienced venture capitalists or angels can provide probably is more valuable than money. A first-time entrepreneur who’s built a great product but has little commercial experience can benefit hugely from the involvement of people who have marketed, sold, iterated and marketed again lots of products over lots of years.
However…somewhere along the road the idea that mentorship is a key component of investment moved its way from the world of later-stage startups into the very different environment of of seed-stage startups. Conventional wisdom now dictates that a seed-stage entrepreneur who is raising initial capital for her business needs to seek an angel or two who can provide wise counsel. Money taken from friends and family, or even from less-involved angels, is pejoratively called “dumb money”, and the entrepreneur is seen as having lost something for accepting it.
I disagree with this view. Mentorship and other support are absolutely crucial for a seed-stage business, but the notion that they must or should come from one or two “expert” angels who are also investing capital—and that capital isn’t worth much without that support and advice—is nonsense, for three reasons:
1. General business knowledge and experience is not a priority for a seed-stage business. Once a startup has progressed to the point that it’s focused on commercialisation, having someone with broad commercial experience closely involved can be very helpful: there are plenty of analogies and commonalities among marketing strategies, operational issues and so forth, and having someone who’s been through it many times before providing a guiding hand can add loads of value, just as the VCs and angels say. But the same isn’t true when an entrepreneur is just starting out and the focus is on taking an innovative idea and trying to turn it into something tangible so that later-stage investors, customers and others will start talking to him. At that stage, the entrepreneur tends to know basically what he needs to do, and having someone with just general business experience closely involved rarely adds very much.
2. Being able to find the right person to help with the right issue at the right time is far more useful. Even though seed-stage entrepreneurs tend to have a good sense of what they need to do to take their idea and move it the first step toward being a functioning business, they certainly don’t know everything. Questions come up all the time: How do I do X in Ruby on Rails? What did the guys who launched Y model in 2007 do wrong? Does anyone know a good accountant? What VCs should I be targeting for my next round, and how can I get an introduction to them? Getting answers to these questions adds value for the entrepreneur, but generally speaking different people will have the answers to different questions. The person who can advise on a tricky coding problem is often not the same person who has a list of good accountants at hand. So what’s most helpful for the entrepreneur is to be able to access the people she needs when she needs them—what I call “pull” rather than “push” mentorship. That’s why entrepreneurship societies, networking events, social networks and other platforms can be so useful to seed-stage entrepreneurs, and it’s why having a solitary expert investor as the source of all advice simply isn’t. (The key exception to this is where what the expert brings is an extensive network of connections to the people who have the answers: Ron Conway is a great example of a single individual adding tremendous value to seed-stage businesses, because they he has a massive Rolodex and is able to connect entrepreneurs with pretty much anyone they want to reach; but he and a handful of other angels are exceptions, and most investors’ contacts lists are spotty, heavily biased toward that person’s industry and region, and therefore helpful to seed-stage businesses only occasionally if at all.)
3. Money and mentorship don’t need to go together. The implication of the previous two points is probably the biggest departure from conventional wisdom, and also the most important: for a seed-stage business, there’s no reason that money and mentorship need to come from the same source. Clearly there are lots of people who are capable of helping a business but don’t have capital to invest—no one disputes that. The problem in the case of a later-stage business—where the type of help required involves a significant commitment of time and effort—is that it’s tough to motivate those people in the absence of a potential financial return (and equity-for-mentorship deals are fraught with problems). As a result, the investors who already have a vested interest in the business’s success are often best-placed to roll up their sleeves and get to work. That problem doesn’t exist when it comes to the “pull” mentorship of seed-stage businesses. Most people—friends, former professors, other entrepreneurs working in a similar space—are willing to volunteer a few minutes of time or words of advice to help an entrepreneur address a particular issue. No reward is expected other than a bit of quid pro quo, which means that the entrepreneur can draw on the expertise and wisdom of vast numbers of people who may not have capital to invest but can still add lots to the business. Put simply, seed-stage businesses can get the mentorship they need independently of the money they need. And by implication, investment that comes without mentorship works just fine too, because the entrepreneur can take the capital and then go seek support from elsewhere.
Money and mentorship are both important to seed-stage businesses (I’ll write more on the money side in future posts), but the idea that they need to come from the same source is antiquated and wrong-headed. Like much in the startup world, a perspective that originated among later-stage businesses migrated into the seed-stage arena, without anybody really thinking about its applicability. In my view it’s a perspective that simply isn’t applicable. An entrepreneur building a seed-stage startup would be well-advised to focus less on getting a single investor/”push” mentor, and more on raising capital from wherever it’s available and then identifying the right groups, networks and platforms through which to reach “pull” mentorship.
