Ooga Labs

I’m getting the feeling that there is a significant gap between what a good Advisor is worth to your start up, and what the going compensation rate for them is in Silicon Valley.  An Advisor typically gets .1% – .4% of a start up, vesting over 2-3 years, with 100% acceleration on change of control.  But they can add more than 10X that value to your company by doing just one of many things including: introducing you to a key teammate like a VP Engineering, giving you credibility where you had none, keeping you from wasting 6 months pursuing a wrong strategy, improving your pitch to investors by 10%, telling you business metrics that would’ve taken a year to discover on your own, or keeping you from signing a contract giving someone a “first right of refusal.”  Good Advisors often do several of these things, adding huge value, but not getting compensated for it.   

Off the top of my head, I can think of five possible reasons this gap persists. 

1) Advisors tolerate the gap because they have fun

2) Advisors tolerate the gap because they believe they will learning something valuable 

3) Entrepreneurs won’t pay more because Advisor performance is too variable.  Maybe the entrepreneur actually IS paying for the value overall because they give .1% – 4% to many Advisors, and only one Advisor makes the difference. 

4)  Perhaps there is no perceived cost to the Advisor for giving a few hours per month.  There really is both a cost and an opportunity cost, but the point is the perception of that cost may be too low due to underlying math, which says ”What’s two hours out of 720 hours per month? Nothing, really.”

5) Perhaps Advisors tolerate it because it’s the going rate, and everyone has gotten used to it.  Kind of like how everyone has become used to 2.5% management fees for hedge funds. 

The other way to look at it might be to conclude there is no real gap.  Maybe I’m imagining it.  Perhaps we would feel this same gap for anyone in a startup if we looked closely at their situation… like the Office Manager, or the Director of Sales, or the interface designer. 

So I wonder what would happen if we created a website that auctioned off Advisor time?  Would the average compensation go up or down?  What should a rational Board of Directors be willing to pay for their CEO to get advice from a guy like Philip Rosedale about their startup?  Or from Caterina Fake about their Website design?

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There’s a lot of discussion about “bad luck” and “good luck” around here. My mom, who was visiting from Boston last week even asked me, “Do you believe in luck?”

My answer is that our concept of “luck” is fundamentally time-based. In other words, given enough time (or iterations), luck, or randomness, melts away, and each of us tends to our talent level.

For example, you can look at a guy like Matt Cohler.  He joined LinkedIn when he first got to Silicon Valley around 2003. Luck? Maybe. Then he joined Facebook. Luck? Hmm… Now he’s an equal Partner at Benchmark. At this point, it’s getting hard to claim luck as the explanitory variable for his success.

Were you unlucky not to raise money before the crash? Were you unlucky when your co-founder went wacko? Were you unlucky not to sell your company when it was soooo close? Maybe, but there may also be a pattern that a third party could easily discern.

I can point to 30+ lucky things that happened to me in the last 10 years that have allowed me to be where I am (where ever that is…). When people ask me about it, I tell them it’s mostly luck. And that’s true for each individual event. However, the full truth is that if you back away and look at a person’s career over 10-15 years, those thirty lucky things happen because of their processes and decision making.

For instance, those thirty lucky things happened because my team and I always work hard enough to have multiple options for every key success factor such as revenue sources, where to lease real estate, who to raise money from, who to hire for a key position, who to partner with, methods for trimming costs, etc. These thirty lucky things happened because I had reasonable judgment on who the good people were. They happened because I chose to move to San Francisco instead of staying in Boston. They happened because I stayed in the game long enough to survive 300 bad things so the 30 good ones could fall on me. Etc. My processes and judgment were such that over time, I am where I am. Over the same period, some people have soared higher, some lower.

It often feels like luck plays a huge role. But as time goes on, there is no such thing as luck.