Startups are hard, so know who to trust
In the last few days a number of people have discussed the world of startup support services and mentoring. This is something that I know a little about having been a consultant CTO and also a startup CTO.
One of the areas that has been highlighted is that it’s very hard as a founder to know who to trust and which are the right kinds of people to bring in to support and mentor.
One of the biggest issues is that, the majority of startups in the tech space are doing something relatively “new” and that means that not that many people will have done the same kind of things. That makes it hard to identify the right support and the right people to listen to.
Not that it’s impossible. It’s just that it’s hard.
Equity or nothing
One of the biggest areas of contention is when a startup finds a mentor/provider/consultant (we’ll just call them a consultant from now on) that in their mind “fits” with their business (can help build it, understands them etc).
I’ve been asked a number of times how both the startup and the consultant should approach the thorny subject of payment since I’ve been on both sides of the fence.
Most startup based people say (something along the lines of) that a person should be paid a sort of success fee. For example if they are a person who helps to bring in funding, it’s not unusual for that person to get a percentage of the amount raised.
That’s the “no win, no fee” argument or the “equity” argument (you win, we win).
I’ve also seen the consultant people say that actually they deserve a retainer of some sort given that they are working for the startup. Why should anyone do work for free with no guarantee of success?
That’s the “retainer” argument.
The problem is the startup
If you look at the stats of startups who get to VC funding, you’ll find that it’s well below 1%. And that’s just VC funding. You can assume they already have a seed round, and the startups that get those are in the few percent range too.
Think about that.
For every consultant in the startup support market looking to “help” a startup, if you look at the “equity” funding argument (or a success fee argument) then the consultant has to be pretty certain that you’re a company worth betting upon (and it’s a big bet with pretty poor odds).
Having said all that, because the numbers are high, a no win, no fee scenario can be pretty decent for a consultant. But that’s not what most consultants get.
Most of what is offered by a startup is some form of equity. Without a form of agreed buy back or agreed liquidation at a certain round, then this is another gamble that needs to be taken by the consultant.
Unfortunately, the startup has already been pushed down a route of considering “payment” as in some way “bad”. Certainly startups are almost the worst at identifying the value of a person in my experience. Very often a startup will have been formed by young people (without dependents, mortgage, lots of bills) with a good idea and domain, but inexperienced. Add to this that the startup world suggests that a founder paying themself is wasting an investor’s money and there will be an expectation of “skin in the game”.
When you take that argument, a consultant will often be asked to do the same and put their skin in the game.
Why should a startup founder take a risk and not the consultant?
Well, because the founder gets the benefit of the long term gamble if it pays off, and the consultant does not (without equity).
And it’s all a gamble.
But most startups don’t have “money” to pay for consultants either.
Identifying value in a consultant
Given that the startup is often inexperienced, then you’d think that the thing they would be most looking for is experience.
In fact, they often do this.
Startups will hire an accountant who is aware of how startup funding, options/equity schemes, tax credits and the like work.
Startups will hire legal people to put at least the basics of the legal part of the company in place.
Startups will give equity away in exchange for space on an accelerator/incubator in exchange for “money” (often part cash, part services/space) and “introductions.
Startups give away things in exchange for things they see as “valuable”.
So why not the consultant?
Most consultant’s add value in the initial part of the engagement.
In other words, the value is often heavily front weighted.
This could be identifying technology roadmaps, or identifying how to present yourself to investors, or creating a hiring strategy, or very good introductions, or sales leads, or… the list is endless.
That front weighting is key though, because the startup often gets the value out of a consultant early.
Often a consultant’s job is to give a strong direction rather than time.
So, the argument from the consultant is that retainer works best because otherwise you get dropped quite quickly once the value has been taken.
In fact, I’ve helped companies go from idea to serious funding (multi-million valuations) on a few occasions. On all but one of those occasions, after the round was completed I was asked to work essentially for free/equity until the next round comes in. In other words, the value had been taken (funding gained) and then there was zero benefit for me as a consultant.
Startups often don’t see the value that is brought in by a consultant in the long term, because everything is short term.
Startups should pay people
My own view is that a startup should never expect a consultant to work for equity. If the consultant offers, that’s their own lookout.
Essentially, working for equity is a gamble for the consultant. Likelihood of payoff is low.
And to be honest, this is the problem.
Startups don’t have a lot of money. And money is strongly linked to the amount of time they have to develop their business.
And if you trust the wrong consultant, you can reduce the runway. Which is why identifying good people is key.
And that is a problem. Because good people are often already in work, or already consulting at a high level.
Which means either that they aren’t available or they aren’t cheap.
For me it’s relatively simple.
If you can’t afford a consultant, don’t ask them to work for free.
If you want them to work for you, then base your funding decisions around it — put their fee into your budget, and raise your round with that in mind.
Good consultants are worth their money.
Most consultants that I know will also expect startup founders to pay themselves too once funding has arrived. It’s ridiculous to assume that a consultant will just expect to be paid a lot when everyone else is getting nothing. So ensure that when you’re raising funding that you put reasonable amounts into the budget to live on.
All this comes down to a simple idea:
Learn how to run a business properly.
Don’t imagine that getting investment as a founder is all about living on nothing forever, because it isn’t. In fact, most investors would frown on this.
Startups can work, and work really well.
But don’t expect to get consultancy for free.