E297: Advisory Boards & LPACs: A Complete Masterclass for GPs

0:00David Weisburd:So Matt, you've sat on more advisory boards and LPAX than nearly anyone I've ever met. You've also been involved in entities that have invested in over 600 GPs, not even funds, but GPs. So you've seen everything across the gambit. What's the biggest gap between GPs in terms of what they think they want from their advisors and their boards and what they really need?

0:26Matt Curtolo:First and foremost, it's this advisor means a lot of different things to a lot of different people. So I think it's defining it. So you have your LP advisory committee, that sort of governance for the fund, oversight of a particular entity or investment vehicle. Then you have a board of advisors, right? That can be independent folks. That can be industry folks. They're oftentimes more firm level, strategy level, maybe helping out portfolio companies, helping in different areas. of firm and fund management. And then you have sort of the general advisor, which may be someone who has functional expertise that gets piloted into different parts of a portfolio, helping out a company, could be doing a lot of different things, but it tends to be a bit more specific on that end.

1:16Matt Curtolo:So as you think about advisory boards, we'll kind of cover all of those, but they are what you make of them. So GPs sometimes go in thinking that this is, I have to show credibility by the people that are involved around the table. So I use the word performative a lot of sometimes these boards end up being looking and feeling not necessarily that functional, but really are put together with the expectation that people will be impressed by it, to put it bluntly. The other piece of that is you have to design it with, I say, purpose and clarity, right? What do we want to achieve by putting this group of people together?

1:55Matt Curtolo:That starts with the GP. And I think that's where a good advisor, you know, you ask about the gap, right? What do they actually want versus what do they need? Most of the time, they don't define it. I think that's where you have to start is the GP defining what they want to get out of this. And then everything sort of follows from that. It can be fiduciary, strategic, could be a sounding board. But I think you need to define that up front. And then I think the rest of it will take shape.

2:20David Weisburd:Like that they're plugging in the gap. So take it to the extreme. If you have the perfect team or you have something for everyone, you wouldn't have any advisors because you would have reputation, you would have all the functionality, you would have everything that you need internally without needing an advisor.

2:35Matt Curtolo:I would never say never, because I think advisors in my current advisory practice, one of the things that folks really are looking for is just someone to tell them objective truth. Right. No one who's independent advisor, I think, is a title that really comes in because that's really what you want to try and get from folks. these, even if you were at the top of your game in terms of the team, the reputation, all of the functional areas within your firm, you're still going to want someone to keep you accountable and to look at things outside of the four walls. So I think that's someone maybe without a vested interest from an economic perspective or material economic perspective, but someone who is really there to tell you the objective truth.

3:22David Weisburd:somebody that's truly unconflicted that's not an lp that's not a board member that may not even have any power and they're really the best friend of the gp and the best friend of the team that's really giving them the difficult and important feedback in a non-conflicted manner very much

3:40Matt Curtolo:i think that that uh i say sort of indexed towards self-awareness and humility as a gp you can't believe that you know everything and you have the right way to do everything. And I think you do have to be humble. This business can humble you, whether that be from fundraising to managing companies. I think about a lot of the early stage firms that I work with, where more than half of the companies go to zero, right? You can't fix that. That's the nature of the business. But you do have to be humble about a lot of this and take in that feedback, the best place to get that feedback. And probably the most willing folks to give that feedback are folks who are just there kind of rowing in the same direction, but not necessarily in the boat with you, to use that analogy.

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6:07David Weisburd:Is it just the amount of time that somebody spends? And how do you go about deciding whether something needs to be a advisor or a team member?

6:17Matt Curtolo:I think it sort of comes in three different versions, right? What is the cadence of their engagement and availability, right? Are they, is this someone who's sitting in a full-time seat? In that case, it would look weird if they have two full-time jobs and are a full-time team member, but you can absolutely get a few hours of their time, a quarter potentially, or have them on call for specific needs. So I think that availability and cadence of the engagement is one. The expectations set, I think, are the other pieces. Like what are they supposed to deliver, right? If this is someone who you want to be able to be engaged on a weekly basis versus a quarterly basis.

6:55Matt Curtolo:And I think going back to cadence, how involved does this person need to be? So I think there is a fine line. And I'd say advisors too, from a compensation perspective, are treated differently than full-time employees. That's probably to turn the dials between cash compensation and non-cash carry, equity, things like that, most advisors take their compensation in the non-cash area. Maybe they have a small retainer, but for the most part, the full-time employee is going to have, or the full-time team member is going to have sort of the full package of compensation.

7:32David Weisburd:Let's talk about compensation. I want to talk about the different frameworks available for best practices for compensating advisory board member. Talk to me about how you go about thinking about that. And most specifically, what are some best practices around determining the compensation for advisory board team members?

7:54Matt Curtolo:So for an LPAC, for an LP advisory committee, there's generally no compensation other than the GP kind of, or covering their travel expenses or things that that they need to incur to attend these meetings. Independent advisors, I think, you know, a lot of firms don't have a huge paid advisory practice, but I think for the most part, like I said, it's mostly carry, very kind of small amount of cash. Let's say for a classic low touch advisor, maybe two meetings a year. They have a brand that the firm can use. They can kind of tap them as needed. I think the market for that is 20 to 50 basis points in terms of the total carried interest pot.

8:44Matt Curtolo:And again, this is very flexible based on firm. Some of that is contractual. Some of that is a lot of people will call it jump ball, or you can be merit-based or performance-based type stuff. But the way I try to think about, like for these carry-only and carry-heavy advisors, structure it like a, I use the phrase, mini partner, where it may be tied to a specific fund. It may be back-ended in terms of the vesting schedule. You don't get anything upfront. So you're really testing out that advisor. Are they adding a lot of value? Have they been able to support what you're building? Have they delivered on the expectations you set forth.

9:24Matt Curtolo:And then, you know, have a kind of a linear, linear vesting schedule beyond that. So no, no vesting a cliff, and then kind of go into linear vesting after that.

9:36David Weisburd:So similarly, like employees, you would have a cliff with advisors and what's the trade-off between that and just vesting them on a monthly basis?

9:44Matt Curtolo:Yeah, I think that the biggest piece would be trying to make sure that you're getting what you hoped you would get before committing to a lot of this, right? That carry is cash is the finite resource. We can do the math on how that comes in and flows out. Carry is a bit more flexible. It does tie back to alignment, right? I think an advisor who's willing to take carry as a form of compensation, all things being equal is more likely to put more effort and energy into fulfilling the role that they've taken on versus someone who's getting paid a retainer to sit on a board and they're getting that either way.

10:24Matt Curtolo:So I think that's the, you want to make sure that they're achieving the goal that you've set forth at the beginning of the relationship when you've kind of signed them up as an advisor, the try before you buy, you can almost put around that. But for the most part, I think that's the difference between what you would want with an advisor versus with a cliff with sort of a period of time where you're testing out the relationship versus starting that clock on day one. What's the typical hit rate for a successful advisory relationship that you see in the average venture growth equity PE fund? It's tough to say like the hit rate on achieving the goals that they've been set out to do.

11:07Matt Curtolo:There's another piece of this where there's kind of a natural shelf life for some folks. So let's say you have an advisor, a board of advisors, or I always say the slide of faces of all the folks that are connected to you. At some point, maybe their natural network is going to age out of the strategy. You're going to have a shift. They're going to be more involved in things. So there's some natural turnover within the advisor pool for funds. But I think for the most part, it's a pretty high success rate for at least in my conversations with GPs, right? They are getting most of what they need from their advisors.

11:43Matt Curtolo:And in the situations where they're not, it's less tenuous to kind of turn them over or let them age out of that situation. So I think it's a relatively high success rate. A lot of these folks are known to the investors and to the GP team. So even if there may be some misalignment, there's an opportunity to have a conversation around resetting expectations and maybe go there.

12:07David Weisburd:As a manager goes from one fund to the next, there's a natural point where you could decide whether to re-engage so you don't have to, quote unquote, fire the advisor. There's just a natural transfer.

12:19Matt Curtolo:It's a very flexible relationship. I think that's partly to your question before of what's the line between an advisor and a full-time person. Flexibility might be the number one piece of that. And these are folks who themselves will likely have, let's take someone who's mid-career, who wants to be active. I see this a lot in venture. Somebody who's chief marketing officer at a large company, at a large hyperscaler perhaps. they really get a lot more than just compensation by being involved with early stage firms. They get to see and touch and feel some of the things that are out there. They also get the pay it forward aspect of helping earlier stage companies scale.

13:04Matt Curtolo:So I think you have some of those folks where they may just get busy or they may have a great windfall where they're not going to be an advisor anymore. They start their own family office. They go off and do their own thing. So I think you have a lot of just natural things that happen within the ecosystem that cause that turnover.

13:22David Weisburd:So let's say you have a GP that's starting their franchise and building their fund one. How would you go about advising that GP to build their advisory board from scratch? Tell me the step by step.

13:35Matt Curtolo:Why don't I talk about the LP advisory committee? Because in this case, I think that's for first time funds by their very nature, this is the first time they're doing it. So I think what do you want this group to accomplish? Right. Back to some of the earlier points, the purpose, the expectations. Is this a group that's going to be approving valuations and governing conflicts? Is it going to help you raise capital? Is it going to help you hire folks? Is it, you know, I think defining that role, whatever it might be, the structure will follow beyond that. I also think keeping it manageable for a first time fund is important, right?

14:12Matt Curtolo:I think there's, I've sat on LPACs with 25 people. There's where it becomes a bit performative, right? For the GP, you have to manage all of these relationships. Folks who have that seat want to have maybe some extra attention. That's a lot, but inevitably there's a core few folks who really matter. That might be two, three, five. So the tighter, the better, I think, on the advisory committees. And then I think finally you want to align the expertise to the strategy. I'd say like if you're an earlier stage operator led fund, you might only need one advisor here. And this is kind of pivoting into the broader advisor rules.

14:58Matt Curtolo:You might have a former CEO who's run a bunch of companies, who can be a coach, who can do intros, who is more that Swiss Army knife type advisor. But maybe just to switch back to the LPAC, pick folks who are going to be genuinely helpful as you build out your firm, right? It's not to say you even need a formal LP advisory committee. I'm involved with a few managers where it's informal, but we have regular conversations around, hey, I'm running into this problem with my administrator. Hey, I'm doing my first annual meeting. What should I do in my own advisory practice? Now, that is a big piece of just helping folks get that bandwidth and leverage and wherewithal of people who've been there and done that.

15:44So I think that's the way a first-time fund should think about their LP advisory committee.

15:48Matt Curtolo:Get me sounding boards, folks who've been there, folks who can kind of serve as a river guide and help me navigate. and then with advisors really align that strategy, align the expertise that you're targeting with the strategy that you're running.

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17:46David Weisburd:And obviously, the advisor could be some form of the part-time hire. So it actually has nothing to do with advisory board. It has to do with the fund itself, figuring out what is needed internally, and then figuring out whether advisor is the right tool to solve that need.

18:01Matt Curtolo:I think that's well said, David. I think that the reality is it can take so many different shapes. I've seen good ones. I've seen bad ones. I've seen a lot that are there for fiduciary reasons. These LP advisory committees generally in the LPAs, GPs say we are going to have an LP advisory committee made up of X, Y, and Z that's going to meet once a year and do these things. Right. So back to the idea of being performative. I wouldn't say it's performative in the sense that it's a big song and dance.

18:35David Weisburd:You've mentioned the word performative. I get what you're saying, which is essentially window dressing. But isn't that really important for a fund one or fund two, somebody that's an emerging manager to have the right optics around a fund? I know no one's supposed to talk about that, but the reputation, the optics, and really, I think it's true skin in the game. If you have the former CEO of Pepsi, who obviously made a lot of money and has a lot of reputation on the line, if he's on your advisory board, it is a strong signal, even if he takes two phone calls a year. So shouldn't advisory boards have that performative aspect as well?

19:14Matt Curtolo:Yeah, it's worth digging into what that actually means. Because I think from an LP's perspective, when I see a page of all the faces of all the people that are well-known, have had great careers, a bunch of logos of the companies they've worked at, my immediate next question is, what do they do? How are they compensated? How much time are you getting there? So on the surface, yes, I think it's important. If it is only there as window dressing, to use your words, then I'm going to sniff it out. And that's going to have a black mark on the record. Whereas I'll give you an example. There's a great manager that I've invested with in the past in Seattle called Fuse.

19:52Matt Curtolo:They're an early stage venture firm. They have all the logos of all the big firms in the Pacific Northwest. And these folks are tactically and strategically used. They're LPs, but they're also advisors. And it is doing the diligence when an LP kind of goes through that process. hey, founder X, why did you choose this firm? Well, we talked to the former CEO of Starbucks or Costco or whatever it might be, and they were able to make an introduction. So I think it goes a layer deeper, right? It's the slide on the page, but is there substance behind it? That's where I think an advisor group becomes a weapon for the firm, right?