Advisors: can’t live without `em

At the end of the last post I posed the question: why do European entrepreneurs need people like First Capital?

Let me open with a couple of recent quotes from VCs over drinks:

"My view on entrepreneurs using corporate finance advisor’s skills is comparable to me selling my house.  I didn’t want to become an expert in conveyancing and mortgage mechanisms but I had to develop some of these skill. It’s a necessary evil.  The same is true for an entrepreneur who wants to raise finance; they have to develop the necessary skills to talk to VCs.

Another one was:

“How hard can it be?!  What does it say to me if an entrepreneur can’t work their networks to get to me and then generate a little competitive tension by running a decent process?

I have to disagree.  I have worked with large numbers of excellent entrepreneurs.  My first point is that if a company is using an advisor then it tells an investor a lot about an entrepreneur:

1) None of the quality entrepreneurs I know want to become an expert in raising capital. They are happy to know their ratchet from their double dip but they want someone else to put it all in context.

2) None of the entrepreneurs I know want to spend enormous swathes of time raising capital. They want to spend time on their companies: development, A-B Testing, business development,  sales, collecting cash: whatever. Happy to talk to investors, but lets keep it in perspective.

3) None of the entrepreneurs I know want to talk to just one investor. They know it’s a good market.  They know the best companies get multiple offers.  They want the CHOICE.

4) What most entrepreneurs DO want, is great investors.  They do want the brand, the strategic input, the operational advice, the workshops and the conferences, the exit planning, the introductions and the profile building that comes with great investors. 

A decent corporate finance advisor gives an entrepreneur these things.

Of course, an investor will still have to work out if they want to invest, and my experience was that the reputation of the advisor still has a big impact on how much resource the VC is prepared to expose to the company.

However, I have still not answered why advisors are so dominant in Europe.

I think there is both a theoretical and anecdotal reason.

1) Theoretically European management teams need more help.  Let me give you an example from a VC;  Amadeus Capital have long believed that European VCs themselves need to employ associates rather than adopt the top-heavy General-Partner only structure that we see more in the US.  This is because they believe the average European technology company is less mature and has less aggregate management experience. VCs employ associates to give additional support the portfolio companies. 

Maybe advisors fulfil a similar function.

However, I prefer the second explanation.

2) Anecdotally, the standard of advisors (just like the VC market it serves) is getting better and better.  First Capital has an overarching focus on quality of analysis, rigorousness of thought and focus on specific technology markets that is rare.  The scale and depth of analysis that goes on before a recommendation is made, is phenomenal.  I understand from many non-execs, investors and execs that no-one else offered this standard of service before we started First Capital.

Admittedly there are still some remnants of the cring-worthy old guard are still around. However I am proud that since we started First Capital, the quality of competitors is increasing (GP Bullhound was a name that came up). 

I see quality advisors as a valuable and important part of the ecosystem.  Maybe I'll be changing my view of advisors over thenext few months.  I'll keep you posted...

Comments

[Xavier de Lecaros-Aquise]

;) Nicely written Paul. I would however add that by simply looking at the numerous instances in blogs, networking events and elsewhere, where even experienced entrepreneurs have starvingly sought for advice on Term Sheets, the VC psyche, company presentation, etc. I am confortably reassured in the need for advisors. Nevertheless, as you quite rightly point out the quality of the advisor is yet another matter.

While great advisors such as Go4Venture, with its European Technology focus and international fundraising network, hit the mark, entrepreneurs need to be aware of the numerous one man bands out there. Advisors are first and foremost educators and as such "quality of analysis" is the name, "rigorousness of thought" is the game.

Xavier de Lecaros-Aquise
Senior Analyst
Go4Venture.com

[Ed French]

Paul,
I like your comments, and although undoubtedly containing much that's true, I can't say that we've had the best experience with advisors (including those you would classify as being at the quality end of the market- although not firstcapital).
Twice we've used well reputed, well qualified and very experienced advisors to help raise follow-on rounds of £2-5m without success, whilst we've done this kind of round without advisors with success. OK that's only 4 data-points, but it still means that we think twice about taking the plunge to engage someone! Hopefully we'll have more luck on the next one!
Best wishes,
Ed

[Paul Sweeney]

I think this is an excellent and timely conversation to open up. One "figure" I have been longing to see, is what the overall industry stats are for Financial Advisors, i.e. Of the projects they taken on, how many get submitted to VC's, how many got to offer, and how many go to full acceptance.

[Sam Sethi]

Congratulations on your new job ;-)