Why Great Advisors Give Terrible Startup Advice
Video Episode
Bad startup advice is much worse than no advice at all, and there's a lot of it around.
I was recently talking with a founder building a prototype stage hardware product. An advisor had told her she should absolutely not raise less than $5 million, if she was going to raise at all. That implies a valuation somewhere around $20 million.
That ask would get her laughed out of every investor meeting I've ever sat in.
Here's what makes this worth a deeper dive. The person who told her that wasn't running a scam. He's a reputable investor at a large venture capital firm. He wasn't lying to her, and from where he sits, he wasn't even wrong. He was answering a question about a company that wasn't hers.
What that number would have cost her
The deals that investor sees all day are large companies at later stages, growing like a hockey stick. She's very early and still trying to prove things out. He applied his usual model to a situation where it doesn't fit.
I see companies like hers constantly, through my advising work and as president of the North Bay Angels. The investors I work with would want to see her raising more like $750,000, maybe a million, at $3 to $4 million pre-money. That's a deal that could actually get done.
Now run the math on what she was told. A $20 million valuation means her next round has to step up from there, somewhere in the $30 to $50 million range. That's an enormous lift for a company at her stage. The likely outcome is a down round, which fouls up everything that comes after it. And that assumes she could raise at $20 million at all, which she probably couldn't.
Here's the part founders underestimate: you usually don't get a second chance with an investor. She was about to walk into her best prospects with a number that guaranteed a no. Then she'd be starting over with a fresh crop of people she'd never met, having burned the ones who already knew her.
Bad advice doesn't just fail to help you. It costs you money, time, focus, and relationships. Those are resources an early-stage startup can't afford, even when the advice was free.
The actual bad actors are the easy part
There are people out there worth running from on sight.
First are the ones who'll take your money to connect you with investors. They claim a big Rolodex of buyers hungry for deals like yours. They do no vetting at all. They'll recommend anyone who pays them, investors know this, and so the introductions carry no weight whatsoever. If anything they carry a slight whiff that you were desperate enough to pay this guy. Legitimate advisors who help you raise money are one thing. People promising to put you in front of all their best prospects are, at best, lying to you.
Success fees are the next one. In the United States, unless someone is a registered broker-dealer, it's illegal for them to take a commission on your raise. That isn't just their problem. Your investors can go to court and claw their money back, and they'll do it exactly when you're hitting hard times.
Then there's disproportionate equity. That hardware founder had given an advisor 10% of her company. When I brought in a full time CEO at Anonymizer, we were five years in, with revenue and about fifteen people, and I gave him 10%. She'd never asked anybody whether that was normal. She'd just assumed it was.
Get second opinions.
But those are the easy ones to spot. The advice that will really cost you comes from people who have nothing but your best interests at heart.
The more credible the source, the less you check it
The more famous someone is, the more credible they feel, and the more weight you give what they say. A thirty second clip from somebody at Andreessen Horowitz can outweigh hours of work with an experienced advisor nobody's heard of.
Free advice also comes with almost no effort behind it. Most people giving it are reciting a page from their usual playbook. It's the thing that always works, in their situation, with the kind of companies they normally see.
That's true of my videos too. I have a particular model company in mind when I make them. You may or may not be that company, and it's worth checking.
Compare how that call actually went. I didn't lead by answering her valuation question. We spent most of an hour on her traction, her validation, where the prototype stood, what she'd learned about the market, what her competition looked like, whether she had any moat at all. Only then did I put a number out. Ten minutes after that, I realized she wasn't ready to raise anything yet. There were real gaps in her model. "What valuation should I ask for" turned out to be entirely the wrong question. The right one was "what do I need to do before I ask anyone for money."
The other advisor gave her a number. I asked questions first, then gave her a number. Same output, completely different origin.
I see the same pattern with European founders. They arrive with decks built on advice from Silicon Valley investors talking about classic Silicon Valley startups, and we often have to tear the whole thing up and start again. How you raise, what valuations look like, what investors want to see: all of that works differently in the UK and the EU. Good advice, wrong continent.
Every piece of advice is aimed at a specific company
Explicitly or not, whoever's advising you has a company in mind. Your job is to figure out what that company is, and whether yours looks like it in the ways that matter.
Four things to check.
Stage. Idea, prototype, MVP, early revenue and traction, post product-market fit, growth. Each one implies radically different behavior.
Capital requirements. These days a software company might need one or two people and enough money to buy a lot of tokens. If you're building hardware, or you need FDA clearance for a medical device, you're in a completely different universe. The size of the raise, the valuation, what you need in place before you ask: all different.
Opportunity size. If the most revenue your company could ever generate is $20 million, all that VC advice goes out the door. It only makes sense if you're looking at $500 million to a billion, with a shot at an exit they'd care about.
Founder intent. This is the one almost nobody asks about. Do you want to build a company where you never again do the thing you started out doing, where you manage people who manage people who manage people? Or would you rather run something smaller that stays lucrative and keeps your hands on the work? Ask yourself honestly what you want out of this beyond money.
The billion dollar exit isn't the only way to make money. You could hold a company tightly and sell it for $15 million, which is life changing for you and a rounding error to a VC. Or, you could build something that throws off a million a year in cash flow and never sell it at all.
A $100 million goal and a $3 million business
While I was writing this episode I had a call with a client I hadn't spoken to in over a year. She opened by saying she wanted to build toward an exit of at least $100 million.
She runs a very specialized education platform. As we talked, it became clear that what she really cares about is working directly with her customers, staying hands on, making sure the quality stays where she wants it. Her business model intentionally caps out around $3 million in revenue. That isn't a flaw in the business. It's the reason the business works.
There's no path from $3 million in revenue to a $100 million valuation with the models she was considering. The number she'd been steering toward was never available to her.
So we backed up and pulled apart the assumptions underneath the goal, and found structures she hadn't considered at all. Options that would scale and maintain quality and customer engagement. At the end she said, "There are way more possibilities, and I need to be way more creative with how I'm thinking about this."
Here's what I find striking about her case. Nobody gave her that goal. She absorbed it. She told me it just felt like it was in the zeitgeist, that if she didn't have at least a thousand locations, what was the point? Go big or go home. She couldn't tell me where she'd picked it up.
That's the worst version of this problem. Advice that comes from nowhere in particular is the least targeted information you will ever encounter. It has nothing to do with your situation, and you can't ask it any questions.
It isn't just about fundraising
This applies to every part of your company.
In the early days of Anonymizer, my board had a lot of finance people on it, and they pushed constantly for process and structure. They wanted OKRs. They wanted detailed projections with high accuracy on everything. We couldn't produce that, and it made no sense to spend money trying.
Fortunately I also had a couple of former operators on that board, and they stepped in and set the record straight. They said "That's fantastic advice for three years from now when the company is bigger. Right now this place is a madhouse and we need to be throwing things at the wall to see what sticks."
Additionally, a lot of the people pushing process are consultants who'd like you to pay them to implement it. It's a classic conflict of interest. None of it makes sense when you're four people in a room scrambling to build something.
You'll also hear experienced business people say things like "never do one-offs, never do custom work, never sell services." That's fantastic advice once you're post product market fit with a product to replicate. In the early days you need to be doing things that don't scale. Build the one-offs. Learn what the customer actually needs and will pay for. Then productize it, and then lock down the customization.
How much scrutiny does the advice deserve?
Scale your skepticism to the cost of being wrong.
Some advice is cheap to test. Run this ad. Spend $100. Try an A/B test on the site. Try a different description of your product. You can do those in a day and have data in a week. I have a very broad acceptance for that kind of advice, because there's almost nothing to lose by trying it.
Other advice is structural. Should you take VC money and make that Faustian deal to go to the moon? Should you rip out your tech stack and rebuild on whatever some technical advisor says is the current hotness? Should you change who your customer is, or what your product is actually for?
Those are large decisions. Run small experiments first where you can. Get second opinions. Just like a medical condition, you don't want to go in for major business surgery until you're sure it's the right answer for you.
Data or opinion?
These two look similar and they are not the same thing.
I can look at a company and say I've seen 30 companies at this stage in this industry pitch to the North Bay Angels, and none of them with a valuation above $15 million got any investor interest. That's data. I can tell you exactly how I know it.
Somebody who says "your company is amazing, you're so differentiated, you're going to change the world, there's no way you should raise at less than a $20 million valuation" is giving you an opinion. It's worth digging into where that came from and what evidence sits behind it.
Valuation methodologies deserve a special mention here, because they look the most like data and often aren't. An advisor sits down with a formula and tells you what you should be able to raise at. I've done whole episodes on startup valuation methods. The reality is they're almost never used to arrive at the number. The investor already has a number in their head and reverse engineers the methodology to support it. Founders do exactly the same thing. We use these methodologies like a drunk uses a lamppost, more for support than illumination.
Two questions to ask any advisor
What would need to be true for this advice not to apply? What situation would make this the wrong move? Anyone with real judgment answers immediately.
How many companies have you actually worked with, not just talked to once, that share the key characteristics of my business? There should be a decent number before you treat what they're telling you as carrying real information.
Including me
I'm an angel investor and president of an angel group, and I mostly work with pre-seed startups looking for angel investment. That's the bias I come from, and most of my videos are aimed at that kind of company. Plenty of what I say applies to any early-stage business, but it's always that model I have in mind while I'm talking.
When I was on that call with the education founder, she started throwing some of my own advice back at me. I had to tell her that yes, that's advice I've given, and no, it doesn't apply well to her situation. She needs a different path to the goal she actually wants, and that means taking different advice than she saw in the videos, because the videos weren't made for her company.
The whole test
It comes down to two questions.
Is this advice for you? Was it built for a founder like you and a startup like yours?
How critical is it? How much time, money, and focus does implementing it take, and how hard would it be to undo if it turns out to be wrong?
That's it. Everything else follows from those two.
If you need feedback, help, or a second opinion, I do a limited number of first time calls with new founder clients each month. One hour, $500.
It's a good fit if you're pre-seed or early stage and working out how to build the business. If you're at a B round with product market fit and you're trying to get into hyperscale mode, I'm not the right guy for you.
And if we get half an hour into the call and either of us decides this isn't the right direction, say so. We'll stop right there and I'll refund your money.
