Startup Roles: Mentor / Advisor / Investor

Late yesterday afternoon, Dave McClure emailed all 500startup founders and mentors. It went like this:

“Hey, you! If you are an accredited investor, show you love a member of 500 startups by investing a small amount. Trust me, even $5 or $10k can make a huge difference, and you should do it.”

After reading what Dave has said in person many, many times, I smiled and went back to watching Glee. (Ricky Martin was on! That man has amazing teeth.)

Over the next several hours, there was quite a debate about if it was right to expect startup mentors to invest in the member companies of the accelerators in which they are mentoring.

I remember a conversation I had with David Cohen of Techstars. He asked me, as a mentor, what did I expect in return. I said a nice meal where I learned more about how the program was doing, and what the incoming class looked like. Quizzically, he asked if I expected equity compensation in the companies in which I mentored.

“Expect? No. If the founder believes I have value to provide past Techstars, then I am happy to discuss it with them.” I replied.

There is a fine line in the world of accelerators, and part of the problem lies in how people define the roles of folks circling about, and part of the problem lies in the motivations of those same folks.

Defining the roles in a startup

Startup: a company that is a member of the current class of an accelerator. Specifically, they have given up some amount of equity in return for some amount of cash and access to the program and network provided by the accelerator.

Mentor: a person who provides time, expertise, and connections to a Company and is pre-selected and filtered by the accelerator. Generally, there is no remuneration by the accelerator for providing these services to its Member Companies.

Startup Advisor: a person who provides, time, expertise, and connections to a startup (who may or may not be a Company) and is NOT pre-selected and filtered by the accelerator. Usually, there is a form of payment in terms of equity or cash. They can range in a wide variety of expertise, from advisor to startup equity to operations, marketing, or business planning.

Investor: a person or institution that provides cash in return for equity in a startup.

How should these roles progress over time?

Commonly, the progression of roles is that someone is a Mentor to a company, then becomes an Advisor or Investor, but that is not required or (usually) expected.

An Investor can (sometimes) serve as an Advisor, but usually, once money enters the mix, they have very different goals than a Mentor and/or Advisor who is not an Investor.

Sigh.

A small business that enters accelerators does it for two reasons: raising money and building a network. Yes, there are immediate benefits to the insane amount of time spent working accelerating your business; and the mentorship is great in terms of getting feedback and direction (although “mentor whiplash” is real, and I have seen many founders get crushed by it).

Early-stage startups find mentors, often based on the ability of that mentor to help the startup achieve its goal of raising money or building a network. Therefore, it’s often easiest if the mentor invests money (creating a positive signal given their closeness to the project), and convinces their network to also invest. (The “hot” startups often don’t need mentors to invest, and often, unfortunately, are dicks about creating space in their rounds or bringing mentors on as advisors because they are drunk with attention).

Should startup mentors invest?

I strongly believe that if people become mentors because they are interested in increasing deal flow and perhaps “getting in early” on a promising Company, then those people are dicks. On top of that, they should not be part of the accelerator ecosystem as Mentors (but as Advisors or Investors, sure…)

If an accelerator is too heavy-handed with its expectation that mentors become investors, then, frankly, that accelerator is scummy.

(To be fair, this was not what Dave was doing. He was being very passionate about two things he is fanatical about: the companies he invests in, and the importance of angel investing to a startup ecosystem.)

Every time I get asked to be a mentor for a program, they ask if I expect something, like advisor compensation or shares. I always say the same thing: “I expect the companies that take full advantage of the program to achieve their goals more readily than those that come in with messed up expectations. I’m happy if the companies I work with crush it. And if all I get out of that is a “Thank You” email, I’m cool with that.”

I’m also very particular about the startups and founders I get passionate about, because I want them to succeed and will do whatever I can to help that happen. This is not unique to me, in fact, most of the mentors that I meet that completely blow me away have similar goals in mind.

As a mentor, should I invest in the companies I mentor?

Yes. I should.

[Side note: One shouldn’t/can’t invest in a venture-backed company — one that issues shares — unless you are “accredited,” or in rare cases “sophisticated.” Accredited means you have a net worth over $1M and sophisticated is that you don’t have a net worth of more than $1M, but you understand all the risks. If you are a company that is accepting investments from unaccredited, non-sophisticated investors, you are creating a potentially huge problem later down the line in due diligence for a merger, acquisition, or IPO.]

It is that simple. Folks that want to become startup mentors do it because they want to see the companies succeed, and one way to help the company succeed is by investing in them.

What if that amount is nominal? $5k, $10k USD?

It’s still meaningful in both signaling other investors that the early-stage company is worthy of larger investment, and shows the founder that you weren’t just spending time out of obligation, but out of excitement and support.

What about the role of investors?

Here is where it gets tricky…investors should not mentor. Mentors should invest. When being a startup mentor, the values and goals of the mentor mentality should supersede the goals and desires of the investor.

Take off your investor hat when determining which companies to work with, and equally important, small business, take off your “I need investment” hat when selecting mentors.

One of the things I like about 500 startups being a fund and accelerator with a blurry line between the two is that all the early-stage startups that are in the accelerator start on equal footing. Some of the other accelerators that have a fund associated (loosely or otherwise) create a different dynamic because of it. I also like that the “Sith Lord” of 500 startups is so passionate about getting all of his companies funding.

What I don’t like is that the basic premise of the accelerator and the mentor/advisor/investor has gotten so screwed up that in the end, the companies are hurt by their inexperience with dealing with each type.

The takeaways

It is imperative for the accelerator to educate their companies on the roles and expectations of mentors, startup advisors, and investors. For mentors to mentor, good advisors to advise, and investors to invest. The clearer the role definitions, the more value the company gets from the accelerator, and the startup ecosystem is continually improved.

This entry is a repost from Micah Baldwin’s personal blog.