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.

Creative endeavors are, for creative people, estatic experiences.  Playing music, writing poetry, sculpting, designing websites, cooking, etc.  Fun and spiritually fulfilling, creative endeavors also make you popular.  Creative people will create for free.  Even at free, it’s a good deal. 

But in every age, technology favors some creative talents over others with huge quantities of money.  Often shocking amounts of money.  I started thinking about this when I read Billy Bragg’s editorial calling for Michael Birch, the creative genius behind Bebo (who is a friend and Adviser to Ooga) to share some of his earnings from the sale of Bebo with the musicians who put their music and video up on Bebo’s site and contributed to Bebo’s popularity.  A good summary of the resulting debate is here on ReadWriteWeb. 

It occured to me that Bragg feels wronged because he doesn’t understand that a technology shift has taken place and he, with his talent for recording music, will no longer be over compensated for that talent, something which he would actually do for free.  The new creative talent which is being over-rewarded is inventing great user experience on computer screens — something Birch would probably do for free, given that it’s fun, inherently fulfilling to do for him, it touches millions of people and it makes him popular.  His particular bundle of creative talents happen to fit with the economics of creativity in this age. 

Let me flesh out a few more examples to amplify.  In the mid 1800’s a grandfather of mine (who was an American) married a Von Brandenberg woman in Germany, where he was living with his dad who was the conductor of the Berlin Orchestra.  I found out a few years ago that a Von Brandenberg is kind of royalty in Germany.  How could it be, I thought, that my dumpy ancestor could marry a royalty.  I didn’t make sense.  Until you realized there was no radio back then.  People who played in the orchestra were rock stars of their day, and the conductor too.  Even the conductor’s son was part of the creative elite.  Royalty lavished big bucks on musicians and, I guess sometimes, fell in love with them.  That was the technology of the day, and it happened to favor the particular bundle of talents my great great great grandfather had.

Fast forward to 1925 when my grandfather was trying to make it as a cellist in Boston.  He got paid for playing his cello at dinner at the Chatam Inn on Cape Cod but he could barely support himself and his bride.  When the kids came, he became a machinist and a fork lift driver at a brewery.  His creative endeavor no longer paid the bills because radio was availble and the transition was underway in the 20’s from rewarding live music to rewarding recorded music.  Later in his life, my grandfather would practice and play the cello for free.

Forward to the 1940’s when my grandfather’s sister, Florence, 20 years younger than my grandfather, loved to sing from the time she was three years old.  It was in her nature and she would do it for free.  She recorded 8 albums in the 1950’s which were distributed on vinyl and played on radio stations around the U.S.  She’s loaded!  The technology available to distribute creative endeavors richly rewarded the talent for recording music.

Forward to the 1990’s, when a friend from college who won the Julliard Prize for playing piano, tried to make it as a concert pianist.  She was much more talented than my grandfather, but by the 1990’s, the economics of live music had deteriorated to $50 stipend for an hour performance.  And it takes her 80 hours to prepare for that hour.  She still performs every chance she gets.  She’s willing to do it for free today, while my ancestor got to marry royalty 150 years ago for a similar talent.

Designing user experiences on computer screens may be one of the creative endeavors economically favored by the state of  technology today.   How long do you  think it will last?

We saw this near the end of the first Internet boom, and we’re starting to see it again — consumers are just getting tired of trying out all the new online services we all are cranking out. What that means is that even if you find a way to get a great, new, differentiated service in front of them in a cost effective manner, the consumer is significantly more likely to pass just because they’re too busy figuring out other services they found earlier.

Time Magazine has an interesting article this week about a new book out called “X-Teams” by a professor at MIT Sloan School and one at INSEAD. The thesis is that in corporate management theory, we have become overly obsessed with the internal dynamics of teams as a way of improving productivity and happiness in our companies, while, in fact, the relationships and communications employees have with people external to the company are equally important to productivity, happiness, and ultimately to success. The authors show decades of research proving this is the case.

The article doesn’t mention online services, but it got me thinking that this is yet another reason companies should actively embrace work-oriented social networking services like LinkedIn and Xing even though those services are hosted outside the company firewall, and even though those tools open up their employees to being poached.  For anyone reading this blog, I’m not saying anything new.  But the “X-Teams” research at least provides a credible and logical counterpoint to the fears of corporate managers who have blocked these services or purchased social software tools that are hosted inside the company firewall (company directories, blogs, etc).

The turning of companies inside out is good for them, ultimately. My bet is that tools like LinkedIn and Xing are in their infancy as to what can be done for making work much more fun and much more productive. Those companies will keep pushing the boundaries, or other companies will come along that do even more to connect people inside their company, turn that network outside to great benefit, and make it all more fun, fast, and productive. Regardless of who does it, we will continue to need arguements such as that of “X-Teams” to help managers get over their fears so they can let these services turn their companies inside out to great benefit.

A lot has been written about Facebook getting thousands of developers to build applications inside the Facebook wall using FML and other proprietary languages.  The excitement is in part due to the idea that much of the value created will somehow accrue to Facebook because they are now the platform (even though it’s unclear Facebook has figured out really slick ways to monetize all that action, but they probably will).  I agree it’s very cool.  Like Second Life has been doing for 5 years and Microsoft did so well 20+ years ago.  But as I was thinking about building a branded destination site today, it occured to me that because 65%+ of all Internet visits start with them, Google is the real platform and we are all building applications on top of their platform, the Internet, using their languages HTML, XML, etc.  Just as people go to facebook.com to get to FB apps, people go to google.com to get to ALL the apps.  And with Ad Words, Google has actually figured out a slick way to make money off it already.  And they make us bid against each other!  A pretty slick way to monetize us app builders on their platform.