The Economics of Advice: Evidence from Start-up Mentoring

This paper examines the role of advice in early firm development and growth, drawing on detailed data from a global program where angel investors and venture capitalists (VCs) mentored founders over several months. Leveraging variation in mentors’ availability to support start-ups because of personal scheduling conflicts, I find that advice significantly improves start-ups’ future market performance. To explore how advice shapes early firm development, I develop a novel typology of start-up activities, finding that a defining element of mentors’ advice is to do less and learn more. Although angels and VCs are consistent in this message, they differ significantly in when they choose to advise start-ups in achieving their business objectives. Angels are more likely than VCs to help founders design and execute product market experiments, whereas VCs provide more mentoring support on business analysis and planning tasks. I find evidence consistent with the hypothesis that experimentation is a skill developed via learning-by-doing, and angels have a skill advantage in that domain because of having more operational experience. This paper was accepted by Alfonso Gambardella, business strategy. Funding: The author acknowledges support from the Government of Canada’s Strategic Innovation Fund [Grant 811949] and RBC Borealis Graduate Fellowship [Grant 2018-0439]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.05115 .