Wednesday, February 22, 2006

Advisory Capital: Alternative to Venture Capital

Stowe Boyd has articulated an alternative or complement to venture capital that essentially describes Altus Alliance’s business model. We see a gap between what angel investors and venture capitalists offer in the market. To date, we’ve referred to ourselves as “venture consultants” as do others such as Jeff Clavier. We let people know that we go the “sweat equity” route vs. writing checks as VC’s do. He suggests calling what we collectively do “Advisory Consultants” and even proposes an Advisory Capital Code of Ethics heavy on disclosure, openness, and transparency. One challenge I see is that there are lots of wannabees and in-between-jobs consultants claiming to do what we do who might be willing to sign up for the Code of Ethics but don’t deliver on the items laid out in Stowe’s post. From a startups standpoint, at least with VCs, they’ve had to raise capital and had some degree of vetting done by their limiteds. We’d need to go beyond a code of ethics to separate the wheat from the chaff – something akin to an eBay reputation rating though having enough scale would be tough. In absence of that, we let our track record be the foundation for our reputation though our success-based business model is what ends up being most compelling. He wraps up his post suggesting there may be a blending of advisory and investment capital whereby smaller amounts of capital would be invested. We are well down the road on developing a framework along these lines. If you are interested in providing us feedback on what we’ve developed, let me know as we’re in the process of vetting it with entrepreneurs.

Here’s another (Jeff Jarvis’) take:

As VCs find themselves unable to throw big buckets o’ money at ever-smaller, nimbler, quicker startups, it becomes impossible for them to manage their real assets: time, distraction, and knowledge. I think that this provides opportunities for strategic investors who have more than money to offer and also for smart, independent people (such as bloggers, Boyd suggests) who can offer advice, connections, and questions. The challenge is to make this more than a show advisory board but a real relationship and a longer-term commitment for both than old-style consulting (thanks to payoffs in long-term equity). I’ve started down that path with a few companies myself.

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