You're Building Your Advisory Board All Wrong

Sean Weisbrot: Breen Sullivan, the founder of the Fourth Effect. Was it as hard as you thought it would be to get that money?

Breen Sullivan: What our business model is, is to, you know, we are this community powered marketplace and we have close to a thousand pre-seed through series A startups that are part of our membership and that are all fundraising pretty much, you know, in various stages of fundraising. And many of them are in fact actively seeking funding in our private investment club in the fourth effect. And so, you know, I have my own story, um, but I have their stories. You know, I have close to a thousand. Stories. So, um, so, you know, we have a lot of insight in terms of the reality on the ground of actually trying to raise that pre-seed round, raise the seed round, you know, what does that look like? Um, you know, I, I, I think there are some, some takeaways that just unfortunately are true. One is, is that if, you know, depending on who you are as a founder and kind of like who, you know, how connected you are, what your network is, uh, it's a very different path. And nothing in this life is fair. Fundraising is a hundred percent not fair. Um, it is totally who you know, and, uh, and you know, it, it, so you know that that's one part of it. Unfortunately, um, sometimes that can work out really well for founders. It, you know, if you have the right network, I. That a lot of times the people that are making that decision and writing that check, you know, there's the statement that lots of people I'm sure have heard, which is, you know, you, you place the bet on the jockey, not the horse that can really go to your favor if you. You know, if you kind of know the right people and you have the right network, then they might not care very much about the horse and how you know all the problems you're gonna have to actually execute to get to a million a RR. They're going to just believe in you. Um, that's a nice place to be in. If you are not part of that, you know, kind of 2% of entrepreneurs that fall into that lucky bucket, then you know, people are not. Likely to bet on the jockey and they're gonna have to see the horse. Um, and that's, you know, that a lot of times that's called the trough of sorrow. So if you're the 98% of founders, you're in that seat. Um, no one's just handing you money for your great idea. You have to execute. And, um, and that's where it's really, really hard. It's really hard, much easier to have a job. A W2 job, um, most of the time, um, you know, there, there's a million things that can go wrong with any great idea. A great idea is good, but it's just one small little part. Like the really, really hard part is actually spinning that straw into gold, taking that great idea, turning it into something that generates real revenue and can function in the world. So when you get there as a founder. There, there is more and more and more interest from investors, but then you don't need the investors nearly as much. So it's a, it's a, it's a really interesting dynamic. Um, I think, you know, we see a lot of underrepresented founders, especially, you know, 'cause underrepresented founders, meaning. If they're female, if they're not white, they tend to be in the 98%, um, you know, all the time. And, and so we, and we have a lot of, a high percentage of underrepresented founders in the fourth fact. We have everyone, but we have a lot of them. And we watch, you know, we see all different ways of going about it. Like sometimes underrepresented founders, you know, they tend to bootstrap a lot longer. Um, bootstrapping is super painful. Incredibly hard, but if you can bootstrap, the longer you can go bootstrapping, you know, the, the, the you build, the more you build that you own. And so a lot of times bootstrapping can, can be a secret weapon and can have incredible advantages and I think build stronger, more investible companies in the, in the long term. But, um, but that is not an easy path. We see a lot of founders do that. Out of necessity or, you know, if they can make that choice out of the choice. And then then Angel, you know, is another, is kind of the next, um, uh, way that founders who are, you know, not in that 2% bucket, that don't come out of the gate already well connected, already being promised 500,000 or a couple of million, you know, to, to go explore their idea. The other founders, they, they, you know, are bootstrapping until they can get a couple of angel checks. And you know, one thing about Angel, that's great. It's that you know it's accessible. You can get it even if you're not necessarily, you can't like clearly show a graph that credibly is a hockey stick up to a hundred million dollars. It's okay. Angels, there's all kinds of angels that are willing to invest with, you know, very different returns than what a venture capitalist requires. Um, so in that sense, it's more accessible and then also it's more accessible because it's about relationships. So yes, when you're pitching VCs, I sure there is a component there that is relationship based, but um, but not like an angel. So, and in fact, you know, one of the ways that we help our founders secure those angel checks is by directly connecting an angel check to their advisory board. And there's a lot of reasons why this makes a lot of sense. Um, you know, one is that. It can really, uh, incentivize an angel who's maybe contemplating writing that first angel check, but has never done it before. They're more likely to do it if now they have a little bit of a seat at the table. You know, they get to ensure a return on their own investment. They're also getting two for one. They're getting. An advisory board opportunity along with writing that check, um, to, you know, their first angel investment. So if you think of it that way, from the founder perspective, what does this person get out of it? You know, that, that makes it a little more of a quid pro quo. Um, also when you are an advisor, you're being granted advisor shares, so you're getting a little equity in that company in a sense. It is an angel investment. You're just, it's sweat equity that you're investing. You throw in some money, you're sweetening the pot, you're increasing those advisor shares or vice versa. You know, you're writing an angel check and then you're getting better deal terms through your advisor shares. So they're very closely connected and you know, we work that lever, um, for our startups. We've worked that lever ourselves. Uh, it's a really powerful one. Um, and then I think I'll stop there for now. But, you know, obviously fundraising is a, it's, you know, it's central to the struggle that you face on this entrepreneurial journey. It's, it's all a chicken and egg conundrum. The world wants you to build great things, but no one's gonna hand you the money you need to build it.

Sean Weisbrot: I've done seven angel investments. I never asked for a board seat 'cause they were all bootstrap. Businesses, cashflow businesses. So the idea of a board is just, it doesn't happen for those kinds of companies at that, especially at that size. Um, and when I try to advise them, generally, they're like, yeah, I just, I just wanted your money. So they don't even want me to be a part of their business. So I like the idea of being able to be active in a company because. Unlike a lot of angel investors, I do have the knowledge and experience to help. I'm not just money and I don't wanna just be money. Uh, which is one of the reasons why I am working with startups to help them to deal with their pitch and their deck and the psychology of investors and all of that so that when they do talk to investors, they're more likely to get investment because my experience fundraising as a founder. Was very hard. It took me years to figure out how to do it correctly. I had to self-fund for two and a half years longer than I planned on doing it. And I spent several times more than I was planning on spending. And even then it was still hard to raise.

Breen Sullivan: You said a couple of things that I've heard from a lot of people and um, and this is largely why we exist. Okay. So you made the statement of you were like, oh, small companies, you know, a board makes no sense. They don't have a board. They don't want a board, they don't care about a board at that stage. Now the, the biggest distinction here, that's so important. Is that there's a governing board. There's like the board, the people that vote, the people that have voting rights through, you know, because of the formation documents of the company, the people that have a fiduciary obligation to the shareholders. That's one type of board. And then there's the advisors. And that is also a board. Now, founders don't think of it as a board. They don't use that word in their head. They just think, oh, I have this mentor. Oh, I have this advisor over here. Oh, I know this guy who can make the call, who can like knows the, you know that this venture bro and that guy, that's how they're thinking of it. But that is also a board. It's an advisory board and, and the, the reason why there's value to the founder of calling it a board or at least acknowledging that the people that are the advisors might call it a board. It's to the founder's advantage to acknowledge that because it's giving those advisors. Something Totally. In addition to whatever they're getting in the experience with the founder themselves. So say, in a worst case scenario, you have a founder that you know doesn't care. They, they don't really understand advisors. What's the use of advisors? I don't actually wanna talk to these advisors. I don't wanna use them, but fine, I'll, I'll, I'll say that they're advisors so that I can put them in my deck or so that they'll give me a check. There are some founders. For sure that don't understand and that do that. So even in that situation, you know, that's like a worst case scenario for the founder. The founder's not getting any value. Those advisors are getting value. 'cause those advisors get to go out in the world in their careers. They, they have for-profit board experience. It, it helps them. Get promoted, negotiate for a raise, have access to bigger opportunities.

Sean Weisbrot: Hey, just gimme 10 seconds of your time. I really appreciate you listening to the episode so far, and I hope you're loving it. And if you are, I would love to ask you to subscribe to the channel because. What we do is a lot of work and every week we bring you a new guest and a new story. And what we do requires so much love so that we can bring you something amazing. And every week we're trying really hard to get better guests that have better stories and improve our ability to tell their stories. So your subscription lets the algorithm know that what we're doing is fantastic and no commitment. It's free to do. And if you don't like what we're doing later on, you can always unsubscribe. And either way, we would love a, like if you don't feel like subscribing at this time.

Breen Sullivan: Now, the founder's a fool when a founder does that, but like a lot of founders are, because founders don't come outta the gate knowing any of this stuff. They don't know what a governing board is, what an advisory board is. They don't know how to contract it. They don't know how to compensate it. They don't know what they should be getting from those advisors. They don't know. And, and there's, and there's very few. Sources of credible information that will help those founders like actually figure this out for themselves. So that is the void that we are filling. Like that is like our primary reason to exist is to reeducate all these founders. So to, to get these founders when they're really early stage. And the reason why they'll pay attention is because they need money. So they don't know they need advisors, they don't understand advisors, they don't want anyone to tell them what to do. They don't care about a board, fine. We say to them, we get it. But here's a way, like here's strategy. Here's this thing you can do that will get you money. I. It involves taking these people and, and we're gonna call them advisors because that's the name that works for everyone. And these people, you're gonna give them a teeny, teeny little teeny sliver of equity that's gonna vest month over month for a short period of time. And these people are going to. Achieve these really important milestones for your company so that you can get a check from the VC or from an angel, or these people are going to give you a check and they're gonna perform those milestones. So that you're getting some money in the door, but at the end of the day, the founders are sitting on this under-leveraged resource and, and it's really hard, like, you know, being in the founder seat ourselves. In the beginning building this company, I was looking at it from the advisor side. From the executive side, I'm, I am a general counsel to mid-size scaling tech companies. By background, you know, I was an executive in corporate America. I was looking at this from, I don't really care. As much about the founder side, I want to go sit on advisory boards and I want my way in to for-profit, board service. I wanna start earning equity. I wanna have my own portfolio of wealth, like I wanna compete with the men in my tech companies. That's how I was approaching it. I. Actually building this. And you know, now being in the founder seat, you know, we, we've had the, you know, the great privilege and the benefit of really walking in both sets of shoes. So when you're on the founder side, what you realize is, I totally understand now why founders don't do this, why founders don't make use of advisory boards, why it's so daunting. It's, it seems overwhelming. It seems like, you know, ambiguous. What, what is the value? And so that is the code. You know that we're working every day to crack. Like, how do we, when when a founder comes to us, how can we stage them? How can we say, okay, you're a pre-seed founder, you know, in this vertical, in this industry. These are the skill sets. You know, the, the kind of archetypal, like, these are the areas where almost certainly you need these skill sets to help you hit, you know, these, these KPIs in your financial model. So that you are getting closer to a business model that is actually executed so that you can take money from investors. So, you know, so that's, that's really where we come in. And of course, you know, is it enough that we can be a resource for founders to, you know, to educate them and give them this edge? You know, probably not, and this is why we have the investment club. We encourage them to actively fundraise. We're helping them get those angel checks. But why we ourselves are starting to invest in our founders because, you know, they need, like, it's not enough to give the really clear roadmap, the framework and all of this insight and advice to take advantage of this thing that will help them be successful. You have to also give a really clear path to money if they do it. And so, so that's, you know, that's what we're. That that's, you know, that's the business we're in. Um, but anyway, I know that was a lot more than you bargained for with that question, but the, but I think it's really important to make that distinction.

Sean Weisbrot: So I've encountered pushback from early stage challengers when I suggest that I advise them because I can see that there's value I can provide them, but they struggle to understand what that value is. And because my, my business is on being able to make money. So of course I'm looking to work with companies that can afford a monthly retainer because as you said, you don't want someone to sign up for a month. You want 'em to sign up for at least a year, because over that year you get to have the ability to really help them to make traction with what they're doing. And as you said, a lot of founders. Really struggle, a first time to know what they don't know. And then the advisor, as far as I'm concerned, is there to help you fill in those gaps of what you don't know and what you're not expecting. For example, I had a, a pitch review earlier today and what I like to do, because mostly these are all first time founders and they're young, some of them, they're in their early twenties and, and they're trying to raise a million dollars from strangers and. It's for me, it's not just about giving them the deck and the storytelling kind of advice. It's also when I look at their deck and I listen to their story, I go, oh, you said you have a team, but it sounds like this is an outsource company. I. Is that right? Yeah. You saw me. The, the, they're gonna charge you 350,000 to develop the MVP of your game. Like, I'm sorry, but that sounds ridiculous. I go, you don't own, you know, they're gonna try to take the equity, they could take the whole IP and launch it without you, you know, there's so many problems. I go, you should not be hiring this outsource team. You should be building your own team. Find someone who's launched a game before and hire them if they have architectural experience while, and he was like. I hadn't thought of that. He's like, I did think that was a lot of money. I go, and you told me you, you wanna raise 600,000, but like I'm telling you, you need 2 million to to do this. He's like, why? I go, you're a first time founder with no game experience. It will take you at least three times more than you think it's gonna take because you're gonna make mistakes with that money. And that's just how life is. So like you're trying to raise, you think you need 600,000 for one year raise 2 million for two years. Right. And he's like, oh, I didn't think about it. So I like went through specific things like, I don't need to do that. 'cause it's a, it's not the purpose of this session, but I, I feel like I have to give them this kind of advice on top of the rest of it because they just don't have anybody else really helping them. I. And so like when he was giving me his testimonial, he is like, you told me so many things. I had no idea, I had no, I never thought about, no one told me any of this stuff. And like I go, I go, and the things I'm telling you are the things that investors, if they're smart, they're gonna be asking you these questions. And if you don't have the answers, they're not gonna give you money. So those are things that will take away from your ability to get money and you need to rethink about all those things. And before you go looking for money, it's like, oh yeah, that makes sense.

Breen Sullivan: It is so frustrating that truly big pots of money are being handed over every day to like 23 year olds that don't know anything. Um, it's so frustrating and so infuriating for many founders that are not in that 2%. So we'll never be handed the money and so they're actually building it first. Um, so. Number one, can't help but have that reaction. Uh, just because, you know, it is the inequity of, of our system is so glaring. But number two, setting the inequity aside. Um, you know that still that, okay, being an exited founder yourself, you know, being someone who has built and scaled companies, that is an archetypal skillset. That every single pre-seed and seed stage startup founder needs as an advisor. So if that, it absolutely, I mean, especially first time founder. Um, but if that first time founder does not have someone like you, does not have someone who has done this multiple times, I. Yeah, that person's, they're, they're just batting way behind. So like, if you are, if you are an investor, if you're someone who actually wants a return on your investment in this founder, you're, it's not just a charity case. Why are you gonna give a million dollars to a founder who could be talking to someone who's done this before and, and instead is not then? And then you're right. That founder's gonna make all those mistakes and they're gonna burn through, uh, $1.3 million. But I don't wanna give my money to a first time founder who's gonna burn through $1.2 million when they could just have an advisor.

Sean Weisbrot: You should tell that to every startup I talk to. Well, you're talking to, you tell that to all of the, the startups you talk to, right? Of course.

Breen Sullivan: Actually, the startups, we, we can tell it to the startups and they're paying attention a little bit. Um, but mostly it's telling it to the investors because, you know what everyone, that, that's really the trickle down. Like that's really what, what will control all of this. So for us, like, you know, our kind of great benchmark in the sky we're striving towards is, you know, when we are the authority. On the, the kind of exponential increase in value that these types of advisory boards bring to a scaling pre-seed, seed stage startup so that no VC out there is writing a check to a startup that hasn't done this. And you know, like what? What happens now today is that no VC is writing a check to a startup that doesn't have financial advisory in intact. Like you have to, as a founder, you have to have a financial model. You have to have thought through your revenue streams and the business plan. There has to be some like kind of financial governance under the hood. In order to take other people's money inside, and we think the exact same thing should apply when it comes to an advisory board. And so if we're successful in our quest, we will have, uh, convinced all the investors. And so then the founders will pay attention because it's the only way they're getting money. And, and then that's good for everyone because what it does is it means we have, you know, venture functions better because the startups are way less likely to burn through $1 million. They're way more likely to like get to profitability and be good businesses because they actually are doing it strategically and correctly. And then it's also really good for the rest of the world. Because it will create millions and millions of board opportunities, which right now we have this total vacuum. We have total inequity when it comes to money and power. So you know, it's only 14% of the population. They have 90 plus percent of all of the equity and all of the board seats. So, you know, when we take a step back and we're like, okay, why is this a racist, sexist world? Why do we have pay equity issues? And I know that none of this is in style now and all of it's illegal and we can't talk about it. But it doesn't change the fact that the inequity is there and that we all suffer because the, uh, the pie is smaller. The pie could be bigger. Um, wouldn't be taking away money and power from anyone. It would be creating more money and power for all of us. And that, you know, that's the economic argument. That is being made over and over in many different forums that, um, that, you know, which gives me optimism that whatever is going on today, in this moment, you know, pendulum swing back and forth. I think for the long haul I. If we don't kill ourselves as a species, which we might, but if we persist, then I think long haul, you know, it's, it's economics and that economic, the economics of of equity are pretty clear.