Call For Participation: Advisory Capital Summit

The handful of posts I wrote earlier in the year about Advisory Capital led to a sprawling, open discussion involving folks like Jeff Jarvis, Fred Wilson, Umair Haque, and dozens of others. It also, I am glad to say, led to a lot of emails from companies looking for advice, and a handful of folks contacting me to follow up on the idea of an event dedicated to the topic.

So, I am hereby calling for participation in the development and planning for a one day Advisory Capital Summit. My hope is to hold the event in San Francisco in late June, but everything is in flux at the moment. I am seeking a sponsor to offer a largish conference room (up 100 people, or more, I estimate), other sponsors to help underwrite the costs of the event (breakfast, lunch, cocktail party), and, of course, participants to offer their views and experiences in this emerging space.

For example, here are some of the topics I would like to investigate in the event:

  • Why Advisory Capital, and Why Now? — A group of AC advocates, moderated by me. Maybe Jeff Jarvis would join in?
  • Does Advisory Capital represent a competence gap in venture capital, As Umair Haque suggests? (see here). Perhaps this could be part of a debate with someone like Fred Wilson (are you willing, Fred?).
  • Are you looking for an Advisor? How to find the right sort of advisor to help you and your business. What sort of companies will be best served by AC, and which kinds won’t?
  • Best Practices — Some case studies from companies that have been involved in AC, and an exploration of emerging best practices.
  • The finance side of Advisory Capital — Some have complained that ACs shouldn’t be paid if they are compensated through stock, but I would like to see a comparison with other early-stage players, such as founders, and investors.
  • Advisory Capital Contracts — I would like to have some lawyerly mind look into the differences between advisory boards, venture capital, consulting, and advisory capital, which has bits of all three involved.
  • And of course, a cocktail party.

Of course, I am open to other proposals for presentations or topics, as well. Please email me at stowe DOT boyd AT gmail DOT com with any thoughts or recommendations, if you’d like to help with the event in any way, or if you represent a company that would like to host or sponsor the event.

I am hoping to pin down the particulars quickly, and I have set up a registration page for the event: http://acsummit.mollyguard.com. I am currently limiting the event to 100, although we may relax that when the final venue and date are set. Note: If there are any conflicts with attendees on dates, I will provide a full refund of the $75 registration.

Looking forward to getting this off the ground.

A Shorthand For Disclosure: What Type Is This?

Years ago, on my first blog, I typed the various styles of email formats used by businesses. Type 1 was “firstnamelastname@company.com”, type 2 was “lastnamefirstname@company.com”, type 3 was “firstname_lastname@company.com”, and so on. I came up with a long list, as I recall, but the purpose was to simplfy life, so an individual or company could simply say “we use type 6 email format,” and that would be that. (Of course, this was before spam had become such a headache.)

Today, in the interests of simplifying my own life, I am creating another list of types, but in this case they are types or degrees of advisory relationship I have with various companies. As an advisory capitalist, I am developing a portfolio of companies with which I have various sorts of relationships, and I would like to streamline and memorialize my disclosures, at the same time.

  • Type 0 - No advisory relationship, no financial interest.
  • Type 1 - No advisory relationship, financial interest.
  • Type 2 - Informal advisory relationship, no financial interest.
  • Type 3 - Formal advisory relationship, no financial interest.
  • Type 4 - Formal advisory relationship, financial interest.

Type 0 is the baseline case: no relationship or interest. Type 1 is the situation that might exist if I bought stock in a company. Types 2-4 represent the various flavors of advisory relationship that might represent some sort of conflict of interest that I — or some other blogger — might want to disclose in a post.

I intend to tag my disclosures in this way at Technorati, so anyone can look up all of my disclosures, or just my Type 4 disclosures, and find all the associated links. At least from this point forward.

Tom Evslin on Wikipedia’s Anti-blog Bias

Tom Evslin has an interesting post about his recent experience at Wikipedia, where he had created an entry on Advisory Capital (yes, the term I coined a month or so ago) that was “speedily deleted” because of anti-blog bias:

[from Wikipedians vs. Bloggers]

[…]

But Wikipedia is somewhat schizophrenic when it comes to blogs.

I realized this shortly after I created a Wikipedia article on advisory capital (a term Stowe Boyd introduced and many blogs are discussing) when the article suddenly disappeared. “WTF?” I asked myself.

Turns out that it was “speedy deleted” by a Wikipedia editor (there is such a thing – something like a sysop on a message board used to be). The reason given was “lack of context” which basically means the topic was made up out of the blue. The deleted article list pointed to the deleted article policy which told me how to appeal a deletion. I did.

Tom goes into the back-and-forth of his descent into the seven circles of wikipedia, and concludes:

The example of “advisory capital” is a trivial one but a good illustration. Within a few months use of the term “advisory capital” will either have died out or been picked up by the traditional media. According to some interpretations of Wikipedia policy, the article will become appropriate once the term appears on a dead tree. The irony is, of course, the traditional media will have picked the term up from the blog discussion which Stowe Boyd started.

Obviously blogs are authoritative and verifiable as a source for what is being discussed on blogs – the claim I’m making for advisory capital. But it is an oxymoron for Wikipedia to disdain self-published information on any subject. Sure, most individual bloggers (including me) have earned little public credibility. Individual contributors to Wikipedia don’t have individual credibility either. But the aggregate of the information and opinions presented on blogs or Wikipedia articles is an extremely useful source. There isn’t much difference between bloggers and Wikipedians.

One of the many strengths of Wikipedia is that everything including policy is open to discussion (altho Wikipedia disclaims being a democracy). Searching for my missing article and the reasons for its demise, I joined the WikiProject on Blogging to better integrate Wikipedia and blogs. You can join or lurk as well if you’re interested.

The discussion on whether or not to delete the advisory capital article is here. Not sure how that’ll come out (only one vote to keep so far) but I’m more concerned with the overall issue of blogs as one of many useful types of source than with this particular article.

I in particular liked Tom’s recommendation to the Blog Wikipedia project to counter the bias against blogs and level the playing field with other media:

[from Wikipedia:Articles for deletion/Advisory capital]

I have added a proposal to the blog wikiproject that an acceptable measure of current notability be the appearance of an article subject with a high technorati rank (or other measures of blog attention). Note that this does not make blogs an authority except on the subject of what’s being discussed - and does avoid narrow or vanity articles.—Tevslin 20:06, 22 March 2006 (UTC)

The whole thing is surreal, for me, since I am in the early stages of planning a one day summit on the topic of Advisory Capital (about which more later), and have been talking about the concept with dozens of people. This flap at Wikipedia makes for a strange backdrop to that.

More action on Advisory Capitalists

My recent post, Advisory Capital: A New Basis For Strategic Involvement, drew a range of commentary and critique. One theme I saw many times is that this is not an innovative idea, many people are doing it already. Indeed, several folks stated that this is the business model for their companies. Maybe I just the first to articulate it the way I did. Maybe it’s just timing.

I have read a dozen or more responses, and here I am pulling out the ones that strike a chord:

Fred Wilson of Union Square Ventures wades in:

[from Advisory Capital]

I think Stowe is right that advisors have a growing role in the startup equation for many of the reasons that he articulates. But I think it isn’t possible to completely replace the role of the VC for a couple of reasons.

1 - Unless you have capital at risk or some other form of “skin in the game” like sweat equity, you cannot and will not feel the thrill of victory and agony of defeat that binds the VCs and entrepreneurs in startups. Capitalism works for a reason. Greed and fear are powerful forces. I have worked with many “independent directors” over the years. And they are often incredibly good directors who add value in all sorts of ways. But they don’t feel it in their gut the way the entrepreneur does. VCs, particualarly the best ones, do feel it in their gut. And so they are there for the entrepreneur when they need it most, joined at the hip with the risk/reward belt.

2 - There is a growing market of angel money that is sophisticated and acts a lot like VCs. There are even “super angels” like Pierre Omidyar, Mark Cuban, and the like who can invest as much or more than most VCs in a deal they like. These angels bring most of what a VC firm can bring to the table if they so choose and can write smaller checks. I’d suggest before entrepreneurs give equity to advisors for no cash, they think about angels instead.

The bottom line for me is that cash at risk is a critical part of the relationship between the entrepreneur and their VCs. It provides the foundation for all the other roles that the VC plays - advice, oversight, connections, etc. Without it you won’t get close to what you get with a VC.

I agree with Fred about “skin in the game,” and that’s why I push my clients to step up their typical advisory board stock grant from 0.25%-0.5% to something larger, so that the stake is enough to make a difference in my future. Regarding the cash, many times the founder themselves are not putting in hard cash: they are forgoing pay in order to invest sweat equity. That’s why I provide a 50% or more discount of my consulting rates when working with Advisory Service clients. I am investing the difference.

If entrepreneurs can get the knowledge, connections, and experience that an advisor like me brings to the table from an angel, great! Take the deal, take the money, and strap that angel to the harness. In the meantime, I play more of the role of a part-time founder.

Jeff Jarvis makes the best counter to Fred’s arguments:

[from The VC Olympics]

I think the point of Stowe’s post is that equity gives advisors the sense of material involvement in a startup that is better than consultation, and that by making such arrangements, one can get advice, connections, and expertise from people who are, in many cases, at least as qualified as the people who happen to have money.

Or here’s another way to put it: Money is a commodity, nobody’s is better than anybody else’s. But knowledge and connections are uniquely valuable. And in an time when startups need less money, then the relative value of knowledge increases.

Note that this is precisely the example that Publicis’ new Denuo is following. Now in their case, Publicis is a giant company that could, indeed, also invest capital. But so far as I know, Stowe Boyd isn’t filthy rich (yet). And yet his advice would be very valuable to many startups and they should find the way to get it without requiring him to invest.

The larger story here is that venture capital is not escaping the explosion of business models that is also hitting media, advertising, retail, and many other industries. So VCs, too, need to explore new models. Perhaps they need to find ways to involve — and compensate — networks of advisors to bring that knowledge to startups and to spread their own work and risk in finding and helping and managing relations with companies, so they can get involved with more companies at a smaller scale than they can afford to today. If you can no longer bring $5 million to 10 companies but can’t afford to manage 50 $1 million investments — because it stretches your real assets, which are attention and time — then maybe the way to scale is via Stowe’s model.

Fraser Kelton read my post and Fred’s response, and thinks we are both missing the middle:

[ from Advisory Capital? Not When VCs Do It Better]

Stowe argues that VCs can’t/won’t support start-ups with incubator-like services. Fred claims that VCs are vital for reasons other than nontraditional VC value-adds. (Fred, you don’t explicitly discuss your thoughts on a VC adding non-traditional VC value to a firm, which is the underlying idea of Stowe’s arguement. Where’s your mind on that?).

Why can’t an innovative VC firm compete, and gain a competitive advantage by realizing this trend in tech start-ups and adjust their service offering to fill the gap?

[…]

David Hsu, from The Wharton School, published a paper in the Journal of Finance, in August 2004, titled “What Do Entrepreneurs Pay for Venture Capital Affiliation?”. It’s an academic article - here’s the summary:

In the minds of entrepreneurs working to grow their fledgling technology companies, the intangibles brought to the table by their investors – experience and contacts – often are worth more than money itself… David found that offers from more reputable venture capitalists are three times more likely to be accepted by entrepreneurial companies and that, on average, these favored investors acquire start-up equity in the companies at a 10-14% discount.

“Reputation” is defined as the intangibles brought to the table by the investor, and are mainly limited, with respect to the study, to experience and contacts. Fair enough.

Personally, I think VCs are not the only ones in the world with social networks. A good advisor brings that to bear, as well.

Over at Cyclical, we are told that ideas are cheap:

[from Advisory Capital: Forgetting That Ideas are Cheap]

Having been both a consultant, a founder of several businesses, and heavily involved in startups, I have to say that I disagree with some of Stowe Boyd’s analysis of Advisory Capital. Stowe’s description of how a good advisor (or consultant to the business) should operate is bang on, but his expectations for reward with respect to ownership are way off.

Put simply, advisors or consultants who are working for salary (or a slightly reduced salary) are not taking significant risk in their role, and therefore should not expect much participation in the upside. Stowe writes:

A consultant is unlikely to want to part with a strategic concept that could make a client into a $100M player, potentially, in exchange for a per diem and the possibility of some downstream consulting, maybe, if you’re lucky.

IMHO, in a world where ideas flow extremely quickly and first-mover advantage is truly rare, simply having an idea or concept is worth little. If the ideas are that brilliant and worth that much and the advisor wishes to truly participate in the upside, then he or she should either work for deeply discounted rates (or for free), or start their own company to pursue the idea. Ideas are cheap, execution is the tough part. Quite simply, risk = potential reward.

I was trying to contrast the short term kind of relationships that I have experienced in the past, where clients seemed to want two days of intensive consultation — vetting their product, helping them lay out a go-to-market approach, assessing competitors’ products — rather than a long-term investment on both sides, which is what I think is the basis of advisory capital. They wanted a $100M dollar insight for a few thousand in consulting fees.

Nearly all the critics of the model I propose stress the need for investment, and that’s exactly what I am pushing for, as well: the long-term investment of the advisor’s attention to the challenges of the company.

Peter Caputa notes that the AC approach may solve a different problem in VC:

[from comments on the initial post]

The AC concept may be able to eliminate what has been a structural problem with the VC model: that the desires/needs of the VC are not aligned with those of the founders when it comes to cashing out. Paul Graham, and others have written extensively on this.

http://paulgraham.com/paulgraham/venturecapital.html

The cause is in large part due to areas unrelated to the founders or the start-up but rather to the business model of the VCs: their need to have a certain rate of return so they can continue to raise funds and the model where they expect the returns from one or two super star performers to in effect pay for the losses or mediocre results of the rest of their portfolio.

yes, the AC and the client — once the deal is struck, anyway — have the same interests, and the same payoff.

[Update: 27 Feb - I managed to miss an articulate detractor, Bernard Moon, who howls in his ADVISOR CAPITALISTS?… 1% OR MORE? HELLS NO!

Being cynical at times… well, a lot of the time, I see Stowe’s post as part of his pitch to drum up business in advising startups and position himself in a better light. After reading his post, I really don’t see much of a difference between an “advisor capitalists” and a regular advisor.

If I was building an advisory board, why would I give someone like Stowe 1% or more and others the typical .2%-.5% worth of equity (initial equity structure)? This can create a disincentive for the other advisors to put in their sweat since there would be such a large gap between an “advisor capitalist” and themselves in terms of equity but probably not in terms of time and effort. I’m speaking from my own experiences with advisors. As I posted before, some advisors you get to sit and be pretty on your board while others you have to play an active role in building your startup.

Even in my current role as an advisor to a mobile social networking play, I received the typical amount of equity (.2%-.5%). I communicate at least once a week with this startup, active in introductions, and active in their strategic development. Should I ask for more equity? No. From my own experience with advisory boards, I don’t think such activity warrants more equity. Stowe goes as far to state:

I believe we will see this boosted 5X, 10X, or more, to attract and retain powerful ACs.

Again I see this as positioning, and I also see this as crazy. Why would I give any advisor 2.5%-5%+ of my initial equity? Maybe if a contract was created where this advisor devotes 20+ hours per week. Even then would I sign up someone like Stowe who doesn’t have significant capital raising experience? Who cannot advise me on deal structure and provide their personal insights into the capital raising process? Hells no!



Yes, you are cynical. But, yes, I have significant capital raising experience: directly involved in raising over $20M since 1988, and indirectly, much more. Regarding the disencentives to other traditional advisors, I proposed that companies would increasingly have a small number of more involved advisors. If the existence of other players with more stock is a disencentive to advisors, then the differential between their tiny slice of stock and the monster shares of VCs and founders might be the reason that companies generally get so little out of them.

I also overlooked Tom Evslins exuberant posts on the subject. In the first, he agrees with the concept, and in the second recaps some of the debate swirling around it. And here’s a first: he has created a Wikipedia entry for advisory capital, saying

I created an entry in wikipedia for advisory capital because I think the discussion following Stowe Boyd’s introduction of the term is interesting and that wikipedia provides a good place to agree on a definition and draw out the distinction between advisory capital and venture capital on one hand and advisor capitalists and advisory board members on the other. This is also a good place to record either existing examples of advisory capital and/or future developments.

Geeks Need Advice: Umair Haque on The Great Divide

In a provocative post that starts with asking why is Silicon Valley so frightened of MySpace — principally because they accomplished what they have outside the normal SV mindset, he suggests, and in particular, because the valley is not wise to real consumer dynamics — Umair Haque asks a bigger question:

[from Industry Note - The Great Divide: Why is the Valley Afraid of MySpace?]

[…] why are these issues so difficult for the geeks to grapple with?

My answer: because for geeks, marketing, branding, advertising, etc are eeeeevil.

The challenge, of course, is for geeks to understand that it’s exactly this value equation they should be disrupting, not ignoring: making marketing, branding, advertising not evil.

That they’re evil doesn’t mean you should ignore them - it means you should be destroying them and then redefining them: making them less about Madison Ave and BuzzAgent, and more about the deep 2.0 principles that in fact, are revolutionizing the deep economics of many industries - principles like peer production, gift economies, sharing, transparency, social capital, anticonsumption, and deep culture.

Let me be a bit more blunt than I’d like to be: geeks (you too, VCs), this is your Next Big Thing - stop blowing it already.

Yes, exactly: Marketing 2.0, marketing rejiggered, taken out of the hands of the professional marketers, and reintegrated directly into the point and purpose of the things being built and sold.

This casts another light on the Advisory Capital meme: part of the pushback comes from the reframing the roles of various sorts of advisors who get various sorts of returns. Rethinking the deep structure of advice — both to those building products and to those using them — will run directly into the established marketing and venture worlds. In a more participatory culture, advisory capital will have greater intrinsic value.

And I hope that Umair expounds on that list in the weeks and months to come.

[Update: I started this post a few days ago, and hadn’t noticed until the minute after I hid the publish button that Umair has a post specifically on Advisory Capital where he states that he is one. He suggests that ACs are coming into being because of a VC competence gap. He then elaborates in a second post suggesting the world of VC need a radical rethink.

The Coming Market Revolution

Last year I organized a symposium on the topic of Social Architecture with the help of a number of people, including David Weinberger, Mary Hodder, Kevin Marks, Kaliya Hamlin, JD Lasica, and others too numerous to mention. One of the first and on-going questions was “what is social architecture?”

I was trying to apply the term “social architecture” to what I perceived to be the complementary and mutually reinforcing spheres of three entities:

  1. those authors creating original writing (to the extent that anything is original),

  2. those active readers that increase the value and richness of the original writing by ‘gestures’ (such as tagging, bookmarking, linking, and just the act of traveling to the original pieces in the first place), and

  3. the ‘engines of meaning’ — the search solutions — that winnow sense from the gestural trails that active readers leave behind.

This ‘engines of meaning” is lifted from Bruce Sterling:

Ultimately no human brain, no planet full of human brains, can possibly catalog the dark, expanding ocean of data we spew. In a future of information auto-organized by folksonomy, we may not even have words for the kinds of sorting that will be going on; like mathematical proofs with 30,000 steps, they may be beyond comprehension. But they’ll enable searches that are vast and eerily powerful. We won’t be surfing with search engines any more. We’ll be trawling with engines of meaning.

At any rate, while I think my handwave at social architecture — the attempt to understand the lines of force in the new interlinked ecologies of the Internet — was evocative and ultimately useful, it was not enough to understand what is happening outside of the world of blogs. And since I have been spending more time grappling with the larger issues of Web 2.0 apps, I have come to rethink social architecture in a broader context.

A Revolution Among The Revolutionaries

I won’t attempt to recapitulate the arguments about Web 2.0 as a term of art: is it real, made up, useful, divisive? For the moment, let us grant the point that something at least innovative is happening out there, and sometimes that has been dubbed Web 2.0.

I want to pull a few of those threads of innovation out, and outline a model for thinking about these newish apps. And, yes, I believe that the model — like all models — is a lie, a hopeless overgeneralization, but what matters, in the final analysis, is its utility.

In particular, I have been trying to apply the model to the development of useful, innovative applications, particularly with regard to their business cases. Put another way, web app developers would like to figure out if their planned app is likely to make money, and here is a way to at least channel the thought and discussion around that question, and perhaps come up with practical answers to that question, or course corrections if the app seems off track.

An App is a Collection of Functions, Right? Wrong.

Many developers approach the design process for apps by defining a bunch of functions that the app will have to support, and then trying to implement them. Sounds simple. That can lead to an understanding of the app that is something like that in fig 1, below:

figure 1 Functional View

But looking at this simplistic strawman, there seems to be no handle that will help you decide is those functions are actually the right ones, or if in their entirety they actually do something useful. All that context — where the meat of the discussion with my web developing clients actually takes place — is hanging in space, outside of the tangible list of functions. And even the introduction of the newly crowned darling of web developers, “user experience”, is inadequate for the goal of predicting future business viability.

Consider a specific application’s ‘domain architecture’: for example, a wine review application, where the domain is the world of wine, and the domain schema is based on notions like vintage, grape, region, label, and so on. But is it enough to build an app that manipulates the data elements of a domain schema? We know that it is not.

What is missing is a critical and invisible dimension, which, when added to the mix, restructures the application’s context explicitly, and which ultimately answers the question: are these the right functions to implement?

Functionality Is Secondary: The Social Dimension

What was missing in the first figure is the social dimension, and by social I mean a three tier spectrum of social context, going from the individual, to social groups or networks, and last, to markets. As we take the same collection of functions and spread them out across the axis of this dimension, as shown in fig 2, we see that functions can be aggregated by the realm of the social dimension that they are intended to support.

figure 2 The Social Architecture

The function, F1, is now broken into three discrete parts, intended to serve different purposes in different contexts.

First Individuals, Then Communities

As an example, an individual, Jane, may go through the effort of signing up for the Last.fm music service because of the solitary desire to discover new music. However, the implementation of providing such recommendations is based on a social network of other users, whose musical tastes are analyzed, ultimately being aggregrated into ‘neighborhoods’ of likeminded music lovers. Jane is provided her ‘results’ through a highly socialized context: browsing through others’ music, listening to snippets, and reading their comments.

This model is at variance with the Web 1.0 approach to user experience where everything seemed to be a giant catalog, like Amazon, or online dating sites that would take your preferences — “brunette, athletic, sleazy” as Arnold Swartzenegger said in Total Recall — and would display long lists of database output — or in the Total Recall case, implant the right memories. Very sterile and socially empty.

Jane gains the added benefits of participation in the social network of music lovers supported by last.fm, and the network as a whole is augmented by Jane’s participation as well. After all, she is bringing her playlists into the network, too. She is not a parasite. And as with other social network based solutions, there are a host of secondary opportunities for actual involvement with people: Jane may directly ask specific people about music, not simply relying on the intermediation of the solution. The now-expected capabilities to allow users in social apps to interact, to comment on each other’s reveiws or profiles, and the possibilities of other “user generated content”, such as tags, links, ratings and reviews, these form the middle ground in the three tier social architecture. I have come to believe that these patterns of socialized community involvement will reappear in all applications that meet real-world needs.



Online Markets, and An Example: x:post

Just because an application may meet real of some well-defined constituency does not mean that it will be a blockbuster: the groups involved may be small, the need may be satisfied by alternatives, or the benefit, while real, may be so modest that it is difficult to charge anyone in the value chain any material amount of money. This is the realm of the third tier of the model: markets.

The exercise in this case is determining what is at the market’s core: what critical resources are being exchanged, and what is being made more liquid, in the economic sense, by the market.

figure 3 Three Tiers, Again

Here I am representing the three tiers graphically: users as circles, social networks that pull individuals into communities, and markets, whose dynamics support the buying and selling within those communities.

To explore the application of the markets viewpoint, consider an actual case study. I am a close friend and confidant to Greg Narain, CEO of SyncPeople. A few weeks ago, he was reviewing some of the features of the upcoming beta of the SyncPeople application, which provides comprehensive support for a richer, more social conference experience. [Full disclosure: I am an advisor to the company, and have a financial interest in its future. I am not providing an independent assessment of the company’s prospects. Results may vary. Wipe excess goo from hands after applying. If a rash develops, discontinue use.]

During the run down with Greg, one feature caught my attention. Greg was proposing a capability of the SyncPeople solution that would assist conference managers with getting bloggers to provide content that could be repurposed in conferennce blogs. They want to get content, but they want it to be cheap, and they don’t know where to find it. Greg was suggesting that SyncPeople, the company, would act as an intermediary between the bloggers and the conference managers, automating much of the aggregation and reblogging, as well as handling the financial transactions.

I suggested to Greg that we should explore the subject in more depth, because it seemed to me that this capability might satisfy needs of a much larger community: all sorts of people who would like to have high quality blog posts on all manner of topics at a modest price. And of course, the bloggers who would like to make a nickel for their sweat.

In the final analysis, I convinced Greg to consider breaking out this capability as a separate product, perhaps even as a distinct company, because of the size of the market involved. This is the origin of what is now being called x:post, which is going to be a revolutionary marketplace for writers and publishers to create and use, respectively, blog writing in exchange for publishing fees.

I will be able, soon, to register at x:post, create a profile, associate the feed from my blog, and establish my financial parameters. I am, let’s say, willing to let others republish my blog posts non-exclusively for $15 each, and for the exclusive rights (aside from my own use at my blog) for $50. I tag my posts extensively, perhaps even using tag ‘beacons’ — tags that have been recommended by eager buyers — so that posts can be easily found. x:post manages the aggregation and supports reblogging for publishers either through manual or automated means. The financial backoffice debitting and creditting of accounts is managed, again, by x:post.

I was struck by the opportunity for x:post to become a market maker: to make more liquid the critical resource desired by buyers by providing an agora where the negotiations and transactions can take place. And charge a small fee on every deal.

Of course, supporting the social dimension is part of it all. In particular, it is in the interests of all involved that good record-keeping underlie the reputation of all involved: whose posts are most widely read, and referenced? Which publishers pay most quickly?

Likewise, x:post could begin to offer related services to writers, such as insurance or legal services, or accounting assistance, as a direct consequence of their involvement in the market-maker role.

So, I hold up x:post as an example of a glimmering of an idea that was dragged through the social architecture model, and turned into a potentially viable, perhaps even great, company. I have attempted to quantify these opportunities, but we were satisfied because it seemed that what was envisioned made sense at all three tiers of the model:

  1. The individuals — the writers and the publishers — had well-defined, personal needs that would lead them to join the system.

  2. The social network — there is real difficulty for the buyers to connect with bloggers that might be willing to license their posts for money, and the reverse is perhaps even worse of a problem: hungry writers can’t find outlets.

  3. The market — there is no marketplace for blog content to be bid for or offered at a fixed price, even though there may be many potential buyers and sellers if such an agora existed. It there are indeed many small transactions that could be supported — perhaps tens or hundreds of thousands per year — its reasonable to imagine x:post could make serious bank, just from a small taste of each transaction. And if other fees are introduced, like eBays special placement and formatting fees, more revenue is possible

At any rate, I hope that the example at least motivates the dynamics of the model. [By the way, anyone interested in signing up for the x:post beta, which is a few weeks off, please send email to greg -AT syncpeople.com.]

The Revolution Will Be Socialized

So (and with a nod to the Last Poets) the revolution will be socialized!

  • The social architecture I have handwaved at here will come to underlie all the successful applications of our day, and the earlier apps will rapidly adapt to this model or be eclipsed by other apps that do.
  • In the near future, all ecommerce will be socialized: where a user’s transaction will feel as if it is taking place in the context of some social interaction — like reading a review at a blog about a camera, or a vacation — rather than the online catalog or classified experience supported by Amazon and eBay.
  • All truly significant applications will span all three tiers of the social architecture model, and will demonstrate their worth directly by the creation of a market that brings buyers and sellers of some critical resource together in a new way.

As I tell entrepreneurs in my advisory capital work, if your business idea doesn’t create — or subvert — a market worth tens or hundreds of millions of dollars, why build it? There are so many underserved niches, so many walks of life, so many needs and wants, why build another social bookmarking tool, or another blog metrics system, or yet another RSS reader? But this approach allows you to gauge — at least conceptually — whether some new idea is worth the trouble, whether you will ever make a business from it, and if so, how.

This is very interesting

There has been a great deal of discussion in the tech community about the changing needs of Web 2.0 tech startups. When the underyling economics of innovation have shifted so drastically — cheaper high-powered servers, open source LAMP stack, accelerated development tools and techniques (AJAX, Ruby, Php, etc.) — more and more companies can bootstrap from pocket change, and be up and running in less time than it takes to secure capital. As a result, going the VC route is increasingly seen as a brake on this class of tech innovation, not an accelerator, at least in the very earliest stages.

But the needs of today’s start-ups for quality advice and guidance has not changed, but because the VCs have a harder time getting involved — they aren’t geared to make <$50,000 investments, generally — small start-ups are left with a variety of options to fill the advisory gap since they don’t have VCs advising them:

  1. Go without advice from outsiders — seems to happen a lot, but can lead to big goofs.
  2. Go with advice from an extended network of informal advisors — friends, family, and others well-known to budding entrepreneurs may have their interests at heart, but may not understand the market that their innovations will be playing in.
  3. Look for knowledgeable angel investors — those well-off individuals who are geared toward making smaller investments in early stage companies can often be knowledgeable about tech in general, but are not necessarily clued into what is happening in the innovators’ space.
  4. Seek the advice of leading authorities in the market that the product will be competing — and often, this translates to the leading bloggers, consultants, and authorities writing about the market in question.

It is this last option that I have had the most experience with recently, since I have spent most of my time since 1999 blogging about new technologies, particularly those with a dominant social orientation, and in recent months I have spent most of my time as a consultant working with small start-ups.

But the basis of involvement in this shifting territory — the area between the consulting authority, and the advice-hungry innovators and entrepreneurs — has to be rejiggered to better account for the needs of both parties. Pure play consulting may not be workable any longer, because the potential value of the involvement of a specific consultant cannot be accurately determined at the start of an engagement. A consultant is unlikely to want to part with a strategic concept that could make a client into a $100M player, potentially, in exchange for a per diem and the possibility of some downstream consulting, maybe, if you’re lucky. And the best results may not come from a few days of consulting, but a long-term strategic involvement, like venture capitalists typically make in their portfolio companies, the expense of which small companies have historically been unwilling to take on.

What I think is needed is a fusion of the best of both the venture capital and advisory board models. I call this Advisory Capital:

  • Like venture capital, advisory capital is about the investment of a critical resource into a startup. It’s not money, however, but the experience, expertise, social capital, and public authority that advisory capitalists invest.

  • The leverage from advisory capital comes from consistent involvement over strategic scope of time: months and years of frequent interaction. Weekly calls, monthly meetings, quarterly planning sessions. A constant focus on bringing strategic goals into realization.

  • Advisory boards in principle are a way to involve well-known authorities or business celebrities into the mix of the business, but in practice they have become a PR exercise with flabby results, in general. The minimal levels of involvement — an occasional call, an annual dinner — do not lead to great results, because there is not a deep enough investment being made.

  • I believe that someone who will be an effective advisory capitalist will view that role as their primary professional purpose. Just like the best venture capitalists are not doing something else on the side, those moving into this new frontier will not be part-timing it.

  • In order for the AC model to work, other elements of the VC model have to fall into place. The AC has to avoid conflict of interest — if she is affiliated with one company building a product to do X, she cannot do the same with a second company. But this also means that the return on involvement (ROI) for the AC has be be more like a VC than a consultant. For a strategic level of involvement there must be a non-trivial return on involvement.

  • The historical levels of stock participation for the passive, PRish, list-of-names sort of advisory board membership are inadequate for the degree of involvement contemplated. ACs will have to prove their worth, but my feeling is they will prove to be something on the order of 10 times more effective that the Madame Tussaud wax dummies that most companies populate their advisory boards with. And a company will only need a handful of ACs, rather than a boatload of in-name-only advisory board members.

  • Advisory board stock participation is often as much as 0.25% to 0.5% ownership in a startup, subject to normal vesting periods of 4 or 5 years. I believe we will see this boosted 5X, 10X, or more, to attract and retain powerful ACs.

  • Unlike VCs, ACs are not amassing cash from passive investors, and managing it for them. ACs do not have a pool of cash to draw a salary from. (Or at least many of us don’t.) As a result, they will seem like a consultant on some level, since they will charge for their time and expenses. However, at least in my case, I am discounting from my a la carte, short-term consulting rates when moving into an advisory capital situation: when the client is interested in a long-term, high involvement relationship, involving a serious stock share (1% ownership or more).

So, along with coming up with a term to put on the business cards that I have yet to order, I believe that the concept of advisory capital may clarify some of the issues swirling around about the potential conflicts that confront leading authorities — especially prominent bloggers and others in the public eye — relative to their making public comments about companies that they are affiliated with:

  1. Simply by stating that I am an advisory capitalist — and not a journalist, hobbyist, analyst, nor a consultant, per se — I am making clear what I am up to. I am seeking to invest my time and energy into a portfolio of potentially successful startups in return for the appropriate ROI (return on involvement), plus a living wage. By analogy with venture capital, people will be able to bend their heads around advisory capital.
  2. Those that announce that they are, in fact, advisory capitalists can subscribe to the (as yet unformulated) Advisory Capital Code Of Ethics. These will likely be heavy on disclosure, openness, and transparency.

This also suggests another thing for venture capital firms to do: rather than trying to focus on how to reorganize to invest smaller and smaller sums into more and more companies — and thereby diluting their involvement — they need to jump from investing cash to investing advice. This would allow them to vet dozens of very early stage companies, and cherry pick the most likely contenders for future success, even if they didn’t need cash at all yet.

Alternatively, as some of my existing portfolio of advisory capital clients are acquired, go public, or start paying me dividends, I might start investing hard, cold cash on top of the hard, cold advice I am doling out. Or potentially, I could take on investment for my company, A Working Model, in effect making my advisory capital investment fungible. I could wind up backing into a situation where the primary asset of A Working Model is the stake it holds in its various advisory portfolio companies. So, the world of advisory and venture capital may start to overlap, and blur, becoming two halves of the sphere of involvement that drives high tech innovation.