“Many advisors give advice and sound confident despite the fact they have no idea what they’re talking about.”
—Ben Horowitz, The a16z Podcast, Episode 624. One on One with Marc and Ben
How advisor stuff works
Advisors typically make a deal with a CEO. In exchange for equity (typically 0.10%-0.75% of shares outstanding), advisors provide ongoing advice (typically for a 12-month term).
Like Robert Duvall’s character in The Godfather, advisors play the role of consigliere by offering their perspective on important decisions.
Advice for equity.
[Sometimes cash too, but mostly equity.]
How many consiglieres are out there? A Linkedin search for “advisor” returns 7,590,000 results. That’s a lot of people giving advice!
Even a search for consigliere returns another 420,000 godfather whisperers!
I have questions
Immediately I had questions about these 8 million people giving advice:
Who are all these advisors?
What are they advising on?
And, crucially, should they be giving advice?
Based on my preliminary research, the answers to these questions are:
Who are all these advisors? Anyone
What are they advising on? Anything
Should they be giving advice? Rarely
My role in all this
“I must not only punish but punish with impunity. A wrong is unredressed when retribution overtakes its redresser.” —Montresor, The Cask of Amontillado
I’m under the microscope too. Admittedly, I have advisor in my Linkedin headline and have advised 20+ software startups over the last six years. I’ve worked alongside many other “advisory board” members and witnessed myriad advice being given.
Yet I’ve struggled to accurately gauge the quality of the advice. Something just didn’t smell right.
And since bad advice can be disastrous, it’s important for advisors—and the executives they serve—to have a framework for evaluating advice. That’s why I’m writing this blog post.
Who are these advisors?
To better understand the universe of advisors, I did some preliminary research. Here is what I learned about the average advice-giver:
Career length: 23 years (median: 21.9)
Functional expertise: 16 years (median: 16.7)
# of employers: 7 (median 7.5)
Gender breakdown: 79% male, 21% female
N=33 (will continue to add to this and update the sample data)
In summary, the average advisor has 23 years of total professional experience, 16 years in a more specific functional expertise (e.g. sales, marketing, finance), and has worked for 7 employers. Almost 80% of advisors in the sample are male, so females seem very under-represented.
What are they advising on?
Anything really
The top 3 expertise in the sample were: sales, finance, and marketing
Is the advisory model flawed?
Perhaps. I’ve noticed four issues in my modest six years advising startups:
Hard to measure: Often the advice or claims advisors make are non-falsifiable. This makes it hard to run attribution analysis—even with 20/20 hindsight—on the effectiveness of the craft. Things can devolve quickly into rhetoric. Similar to politics, when the noise overwhelms the signal, track records seldom exist.
Circular authority: if an advisor is hired to give advice, it takes a lot of integrity, humility, and intellectual honesty to say the 3 magic words—“I don’t know”—because giving advice is the job. Can you imagine the repercussions if the Godfather asked his consigliere for advice and Thomas says “Godfather, I don’t know.” Most advisors haven’t defined their circle of competence.
Narrative bias: a common tendency closely related to attribute substitution. We’ve covered this before in superforcasting, but suffice to say advisors—and the leaders they advise—are vulnerable to the power of rich narratives (especially a giant success or fuckup). As a result, they tend to overweight the importance of the alluring story in decision making, or mistakenly substitute the story for actual reasoning/evaluation.
For example, when asked "A bat and a ball together cost $1.10. The bat costs $1 more than the ball. How much does the ball cost?" many subjects incorrectly answer $0.10. In the example, the 10-cent answer is the advisor giving you an easy answer vs. thinking deeply about your specific problem. The correct answer—$0.05—requires depth.
Small sample size: given the nature of careers, most advisors just haven’t had that many at-bats and therefore rely on 2-3 formative experiences with high narrative value (see above). Remember, the average advisor in our sample has worked at 7 companies, so the odds they’ve seen the same challenge multiple times are quite low (not to mention the added variability of product maturity, quality of talent, market timing, customer segment, etc.).
When are advisors super valuable?
When the outcome is clear.
If a CEO could hire Frank Slootman to advise him or her on their IPO plans, should they do it? If so, how much should they pay?
Answers: absolutely, and a lot.
Why? Because Frank Slootman has direct knowledge and experience with the specific outcome (successful IPO) and the constituent parts and dependencies, e.g. banking relationships, market positioning, financial reporting, cohesive leadership vision. He also has a verifiable track record of successful outcomes.
Another example: When COO Keith Rabois needed to fix a fraud problem at Square, he called Max Levchin. Max provided Square with code/guidance to help detect and mitigate fraud. It worked. Max earned advisory shares. Worth every penny.
Of course, the Frank Slootmans and Max Levchins of the world are not readily accessible. But the pattern I’ve observed remains: the more specific the problem or desired outcome is, the more effective the advisory relationship.
Define the exact problem(s) you’re trying to solve, or the outcome(s) you seek. If left loosey goosey, the outcomes will follow suit.
Access: Advisors often know people with high believability. If an advisor is out of their depth on a given topic, a CEO should ask for an introduction to someone more credible. The advisor’s network can often be as valuable—or more valuable—than the advisor themselves. This is particularly true with fundraising where the right advisor could fill your seed round via their network.
Advisor red flags
Below are a few red flags I’ve observed in other advisors (and even my own behavior) that should trigger increased skepticism.
“Headline confidence”: when an advisor has an immediate, high-confidence answer without knowing/asking for adequate context.
Example:
CEO: “How should we structure our GTM org?”
Advisor: “The right move is to hire BDRs first to build pipeline, then CSMs for renewals, then enterprise AEs and AMs to drive enterprise deal flow + upsells.”
CEO: “I see.”
What the advisor should actually say: “I don’t know enough about your target customer, your product, or existing talent to give you a good answer.”
“I don’t know”: if these 3 magic words are not part of the advisor’s vocabulary, the circle of competence risk increases.
1-sided arguments: the advisor hasn’t done the work required to have an opinion meaning they can’t argue the other side of their own advice. Munger said it best: “It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side. . .”
A framework for evaluating and working with advisors
To extract the most value from your advisory board, I’ve developed the Prep & Screen method for evaluating potential advisors. Here is a template you can use and iterate off to make it more applicable. It involves a few internal steps (prep) and a written exercise for the potential advisor (screen).
Click image to view template. Source: DBT Ventures
In my experience, 90%+ of companies don’t have a process for evaluating advisors. In the absence of a consistent framework, CEOs default to reputation and personality contests which, like a bad interview, are suboptimal.
Disclaimer: what this article is not saying
Competent advisors don’t exist
All advisors are full of shit
You shouldn’t trust any advisors
But you should be skeptical. And have a framework for engaging advisors. Feedback welcome: luke @ dbtventures.com