“Advisory equity is an investment of experience, knowledge, equity capital and public authority in a company in exchange for some form of equity in the company.”

Advisory Capital, a new twist on venture capital investing, is the direct result of a changing landscape among venture capitalists and entrepreneurs. This landscape has seen a stream of startups that can start up cheaply, ditching traditional venture rounds while also achieving tremendous market success. Examples of such successes include many web 2.0 companies such as Flickr, JotSpot, and Weblogs. Even traditional venture capital firms have recognized this change in funding requirements. Guy Kawasaki has a fascinating post on how he built Truemors for $12,107.09. Charles River Ventures recently launched its Quick Start Program, offering up to $250,000 in convertible note loans to promising entrepreneurs.

Says George Lipper of the National Association of Seed and Venture Funds:

“Tea [issue] it’s the mismatch between the needs of worthy start-up entrepreneurs for relatively small amounts of venture funding and institutional venture capitalists who can’t spare the time to justify managing small investments. So we’ve seen a steady erosion of VC share (and therefore VC time) targeted at early stage and start-up to about 2% of available capital…while that investments in expansion and later stage claim more than 80% “

For startups, advisory capital can be the best of both worlds: the ability to eliminate cash investment (resulting in significantly less dilution for founders) while issuing minimal capital, sufficient to reward profits of the “advisory” part of a venture capital or angel relationship. . I think advisory capital can also be thought of as a “bridge investment,” helping young companies build their valuations ahead of an angel or series A round once initial market traction is gained.

However, some question the role of equity advisory consultants. One of the main concerns of this model is the absence of what Union Square Ventures calls “venture capital.” The argument is that money investment risk “provides the foundation for all the other roles the VC plays: advice, supervision, connections, etc. Without it, you won’t get anywhere near what you get with a VC.” However, Stowe Boyd, the inventor of the capital advisory phrase, contests the USV position,

“As some of my existing portfolio of advisory equity clients get acquired, go public, or start paying me dividends, I might start investing hard, cold money on top of the hard, cold advice I’m doling out.”

Going back to my position that advisory capital is best used as a “bridge”, working with the right person or CA company should lead to angel investor connections and desire. Unless a company is simply developing a lightweight application, there will likely always be a need for outside capital. Ultimately, venture capitalists should look to develop relationships with these air conditioning companies that can act as a filter, helping to vette investments and implement best practices in the early stages; the foundation for long-term success.

Ultimately, the advisory capital function is a catalyst for the next stage, a most favorable cost opportunity for founders and a risk mitigation technique for future investors: win-win.