The Advisor Traps

Over many years of either helping people raise money or providing services to start-ups, I’ve met hundreds of founders and read even more pitch decks.

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I’ve spotted a few common (negative) themes and heard some very consistent feedback from founders.

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Note that in this particular instance, I’m talking about the type of early-stage advisor that you give a small equity stake and/or a retainer to help you on an ongoing period. So not, say, a Corporate Finance Advisor who takes a project fee and a clip of the raise but only works with you during that investment period.

If you’re a start-up or scale-up founder, below are the traps I’d encourage you to avoid.

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Little Black Book Fallacy

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I talk to a lot of management teams whose growth has plateaued. They’re reached the maximum level they can get to with networking and referrals.

They come to us because they need to build a proper go-to-market and inbound funnel.

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It’s interesting, therefore, to see how often founders bring in advisors who are well known in the target industry, give them a board seat, some equity and a retainer, hoping to access their little black book of contacts.

There are two main challenges here. Firstly, it extends the same problem. If your growth is dependent on bringing in well-connected people, there’s a clear cap on your potential to scale.

The second challenge is more profound.

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It almost never materialises.

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The founders end up disappointed but the advisor has their stake and has gotten paid regardless.

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Simply put, the incentives aren’t the right way round.

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There’s nothing wrong with having people in the market bringing business your way. But the structure should be either a channel partnership or a referral agreement.

So how do you handle people saying “I know customers who’d buy your product”?

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Ask them to put their money where their mouth is via a referral agreement.

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That way, you pay nothing if they bring nothing. And if they back themselves, they should be able to make way more via making 10% or more of the orders they bring to you than they could via a monthly retainer.

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Wrong Type of Expertise

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This is a bit more subtle. The advisor seems to have very relevant subject matter expertise – say 30 years in the target industry – but it can still be a mistake. Why? A few reasons…

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It depends on your own domain knowledge. If you’ve been in the sector for 15 years, how much more can you glean (month-in, month-out) from a more experienced version of you?
If you are lacking in some knowledge, you might be better off paying them to help in a tightly packaged project, focused on actionable insights, rather than giving away equity.
There just might not be that much nuance and complexity to the market you’re going after. And you may well find you can learn all you need by talking to customers and prospects for free.
Do you need that advice long-term, or just initial help? Only engage a long-term advisor if you think they can help long-term, with aligned incentives and skin-in-the-game.
Most importantly, they may know their stuff. But do they have empathy with your situation?

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Do they know what you’re going through?‍

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Is their market knowledge relevant for your category-busting product? This point is closely linked to the next trap.

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Corporate Background

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I understand the temptation if, say, your new business is in recruitment for financial services and the ex-People Director of a major bank wants to help you. But do they know what it’s like to be a start-up founder?

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Do they know what it’s like to be a scale-up CEO?

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Simply put, a lot of well-paid, equity-holding advisors have only ever worked in large enterprises. If you’re trying to get from £100m to £250m revenue, they may well be a great help.

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If you’re trying to get from £0 to £100k, from £100k to £1m, or £1m to £10m, there’s a chance they have no idea what they’re doing.

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You’re in a lonely business. Other people who have started, scaled and sold their own businesses know what this is like. Those who’ve never been on a similar journey to yours have no practical understanding of your emotional and operational challenges.

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Complements not Compliments

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Forgive the wordplay, but this is another classic trap. Too many people bring in the advisors that are just like them, fun on the golf course or in the pub.

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We’re attracted to similar personality types who make us feel great.

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The problem is simple and obvious. Compliments are easy. The advisor with the same background and experience as you, who flatters you and your business, won’t get you too far.

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Don’t go chasing compliments when what you need is somebody that complements you.

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If your background is all sales, then maybe you need help with product or tech or marketing or finance. If you’re a relentless optimist, have board members or advisors who are more cautious. If culture is important but you’ve never hired dozens of people, get HR help.

As a final thought on this point, please don’t make the mistake of thinking your unique and different product will sell itself or that prospects will flock to your door because of your wizzy AI or blockchain or voice assistant or whatever technology.

Neither will happen.

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Poor marketing and sales cause companies with strong products to fail.

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We all know plenty of times where great marketing trumps limited product capabilities. Ignore go-to-market at your peril.

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More than just Finance ‍

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A lot of founders understand the need for complementary skills but go too far or too narrow. I find it odd how often boards or advisor groups have two or three ex-CFOs with investment experience on board. One is great, especially as a complement to your own CFO, but how much can you learn from three?

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When raising money and/or exiting, commercial and product/tech due diligence know-how is at least as important as financial or legal DD know-how.

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Moreover, if you haven’t got the commercial strategy and execution stuff right, the best financial advisors aren’t going to make bad performance look amazing. So think carefully about where you need help.

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Wrong Type of Investment Experience

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The Catapult team has experience covering:

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Angel groups
Family offices
High net worth individuals (and ultra-highs)
Specialist SEIS/EIS funds
Venture capital
Private equity
Listed businesses (dealing with buy-side analysts in large institutions like investment banks or pension funds)

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That’s unusual. End of boast.

Here’s the point.

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A great deal of the basic blocking and tackling of raising money is the same regardless of size of raise and investor sought.

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Usually it’s easier to raise tens of millions (off the back of years of proven success) than it is to raise the first £50k. But investors aren’t the same.

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You have to understand the differences and know the rules of the game.

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Dealing with an Angel isn’t the same process as a VC.

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As you go from Pre-seed to Seed to Series A and so on - the requirements at each round stage are different.

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You need to ensure your advisors are aligned with the investment and exit outcomes you're looking for. At Catapult, we get very passionate about two (linked) things.

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Firstly, raising appropriate sums of money from the right investors.

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The adjectives here are essential. You can raise too much or too little (and at the wrong valuation). You can definitely bring the wrong investors on board.

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Secondly, helping founders maximise the equity value they realise upon exit.

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Having the right multi-year, multi-raise investment strategy is essential. Doing it wrong means too much dilution, too many people on your cap table, too much equity given away to the wrong people, inconsistent valuations, and a poor overall trajectory.

There are lots of other things you need from advisors.

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Trust, honesty, working well with you, community, introductions, and much more.

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But we’d encourage you to think carefully about these traps. Think about what you don’t hear from would-be advisors as much as what you do.

I’m always happy to chat over a virtual coffee with anybody who’d like some help on exploring their options. We help with go-to-market, fundraising, finances and a whole host of strategy work. We also have associates to help with projects outside of our core portfolio.

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