Angels Who Charge Entrepreneurs to Pitch: the Debate Heats Up

10/12/09Follow @bbuderi

It’s an Xconomy holiday today, but I couldn’t resist a quick pointer post to an argument heating up across the Web—one that is related to a story we ran here last week about a new Cambridge, MA-based group, Revolutionary Angels, which announced its plans to hold a quarterly business plan competition.

Revolutionary Angels drew fire from a few readers about its plan to charge would-be startups $4,995 to pitch at the competition, in which they could win up to $250,000. What’s been happening over the weekend is that (on Friday night, as far as I can determine) Mahalo founder and Internet commentator Jason Calacanis posted his own long diatribe against the practice of angels charging entrepreneurs to pitch. He didn’t name Revolutionary Angels, but did name five others.

Calacanis’s post is called: “What startups shouldn’t have to pay to pitch angel investors.” And it carries the disclaimer: “written with boiling blood.”

I’ll say. Here are a few of Calacanis’ choice words:

“I’ve been in the startup scene since 1994 and in those 15 years I’ve met, interviewed — and in some cases, pitched — the most powerful investors in technology. None of them have ever charged me a dime for doing so. Why? BECAUSE THEY ARE RICH!

It’s low-class, inappropriate and predatory for a rich person to ask an entrepreneur to PAY THEM for 15 minutes of their time. “

This morning, PE Hub’s Deborah Gage also pointed to Calacanis’ post and provided responses from some of the groups he mentioned. Her summary of the responses:

“Events are not free, according to privateequityforums.com and the Tech Supper Club, and EVERYBODY charges, including TechCrunch — you can charge entrepreneurs, investors or sponsors, or some combination of the three.

Also, they argue, they’re selling a service because they get entrepreneurs in front of serious, qualified investors, which is hard for a lone entrepreneur to do — there are costs in marketing a startup no matter how an entrepreneur chooses to spend the money.”

Check out the arguments and see what you think. Or maybe you have something better to do on a holiday.

Bob is Xconomy's founder and editor in chief. You can e-mail him at bbuderi@xconomy.com, call him at 617.500.5926. Follow @bbuderi

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  • http://www.commonangels.com James Geshwiler

    In Boston and Silicon Valley, I just view it as a poor business decision to charge entrepreneurs. These are competitive markets, and the really good companies have choices. (Also, remember, almost all the returns come from those same few companies.) CommonAngels does not charge entrepreneurs to present or to invest in their companies (legal costs, as in the standard venture model, are part of the financing). Similarly, when I was chairman of the Angel Capital Association, we made it a policy that member groups could not charge other than minor administrative fees, with that exception mainly as a concession to groups in less capital-develop areas where the angel group itself was likely preforming many functions.

  • http://www.linkedin.com/in/andrewkoyfman Andrew Koyfman

    Even though I probably would not pay money to enter an idea into this competition, I have to say in many ways the idea itself is quite brilliant – set up a “prize” for entrepreneurs and charge them an entry fee. You could do it as a lottery :-)

    Seriously though, there is something to the idea – if you believe that there is money to be made in connecting Angels/VCs to Entrepreneurs and vice versa. This could be a two-sided market (similar to credit cards) and in two-sided markets one side pays more than the other.

    As to whether Revolutionary Angels have a good business practice or not, free markets will decide. In either case, it’s not that uncommon of a complaint that VCs treat entrepreneurs unfairly – see Daphne’s post from August. http://www.xconomy.com/national/2009/08/24/venture-model-makeover-diet-plan-step-one/

  • TD

    When you run such a contest, you have to vet entrants. Otherwise, you end up with too many entrants for the judges to give each a fair due diligence. That pre-vetting process, on deals that investors would never have bothered to look at otherwise, costs money. Allowing entrepreneurs to pay a fee and receive this service makes this service available to people who would not otherwise have access. It puts a dollar price on what would otherwise have been left up to the randomness of who you know.

  • http://www.i-nalysis.com Drew Hession-Kunz

    I discussed this last night with my MBA Venture Cap class. About 2/3 thought it was unethical, or borderline, and about a third said it was OK- since the entrepreneurs were offered a service, just like any business, and could buy it or not.

    There has always been a cottage industry of people charging to raise money. Most of them are licensed (series 7)- the legal way to take a contingent cut of the money raised. Those have become harder to get- so this looks like another way to get paid for helping entrepreneurs chase cash.

    Next we will see entrepreneurs self organizing into groups to do this- get a room, fill it with aspiring CEOs, and you create a magnet opportunity for invited angels. Good use for social media, just creating a low friction market.

  • http://www.ibreakfast.com Alan Brody

    I know Mike Segal of Private Equity Forums and we even promote his events. So let me stick up for him in this way: he is known for bringing out-of-town investors and entrepreneurs to New York. That is his strong suit and does that well filling up room after room with investors and entrepreneurs for years. He deals with what I call pedigreed starts-ups: people who have serious experience in their fields, have put a good amount of money into it and can afford to pay to be in this league. Moreover, dotcoms – Digital Media start-ups – are a very small part of his world. Most of his Entrepreneurs have biotech, heavy engineering, energy, packaged goods or financial services businesses.

    These obey totally different rules from the digital world that Jason and his cohort inhabit – so before we get into some version of class war let’s understand that we are dealing with different classes of new enterprise.

    As the organizer of the iBreakfast I should state that we run very modestly-priced start-up events and we give our winning entrepreneurs tickets to Mike Segal’s events so they can see what his world looks like. Some of it is familiar but a lot of it is very different – his investors usually looks for revenue, tangible assets, assumable debt and a host of things dotcoms start-ups are oblivious to.

    I can’t argue with Jason or anyone that access to investors ought to be Free. Why not? If Fred Wilson or Steve Jurvetson wants to see you – go ahead. He might even throw in a VitaminWater. But unless you’re a serial entrepreneur and were recommended to him, the chances are he doesn’t want to see. So events like Mike Segal’s and to some extent, the iBreakfast have emerged put you right in front of investors and get you into the general recommendation system. By organizing it into a marketplace they are entitled to charge what the market will bear. In that respect Mike is no different from a trade show producer or the Wall Street broker that takes his commission and the spread.

    If you think he is charging too much – don’t pay. The iBreakfast offers a low-cost pitching event that grooms, educates and gives start-ups access to investors for a nominal $125. We don’t market it like crazy but then we also don’t pack dozens and dozens of investors into one place. So take your pick. As for the groups that do it more or less free go to them – but they are probably oversubscribed.

    In any event, should one drive out the other or should all of these coexist?

    On the one hand, if Jason can attract Investors and Entrepreneurs from all over the region – or the country to an event, do it on a regular basis and give it away for Free, I say more power to you. I might have a plan or two I’d like to trot out myself.

    But keep in mind a few things on the other hand. Free often drives out the good. Without a financial incentive there is a good chance the forum will run out of steam. Even if the forum continues, they still have to add some kind of value that makes it worthwhile for the investors to show up and for the best pitches to rise to the top. If they can do that, Free may win but even so, many companies would still rather pay for all kinds of reasons – speed to the investor market being one of them. Controlling their destiny might be another. Besides, Jason is in the publicity business – attracting contributors to his “people powered” pedicab of a search engine, firing them up and making them feel important.

    As for the profit motive, well excuse me, Jason had no trouble charging over $1,000 for his Silicon Alley conferences when he could – thereby keeping good information and contacts away from the needy. Why should these organizers behave differently? If Mike Segal can save his Entrepreneurs from traveling all over the country just to see investors and get the word out at once, then there is a value in. Something like a road show in one place. Plus, many investors take this kind of effort seriously and see this as separating these Entrepreneurs from the pack which just can’t afford the effort and therefore may not be as viable.

    That’s why these events take place at fancy ballrooms and not at a taco stand – it makes people take these presentations seriously. Maybe the investor should be paying for the lunch but the market dictates otherwise. Trust me, your doctor who just prescribed your self-righteousness pills didn’t pay for his lunch either if he didn’t want to. The drug company was happy to pick up that tab. More importantly, if an Entrepreneur is flying in from Minneapolis, Free starts to look very iffy while a paid event says this is happening and his time and travel costs will not be wasted on a flake out. Likewise, investors realize their time is unlikely to be wasted by people who are not really committed to their new enterprise.

    Having said all that, I actually welcome Free because it forces the paid guys to do a better job or else. Plus it gives the posers a chance to discover themselves before they do something silly like empty their trust funds.

    As to which approach is really better – let’s say they are different and serve different purposes that may ultimately harmonize. A free event favors just-out-of-college start-ups with those big moonshot ideas like the next Twitter, iPhone Killer App or Search Engine (know of any?) Few succeed but the ones that do, make it really big. They change the world.

    Paid events favor the seasoned player – the pedigreed start-up that has 10 years of experience in a field, often a mundane one where they see the real opportunity in their space, know the players, the customers and so on. The payoff is more grounded but to the investor, is also a safer bet.

    The true serial, successful entrepreneur which includes Jason, only has to pick up the phone. The sensible entrepreneur has to know who they are before they choose their path but they all have their place.

    My prediction – a year from now, all these forums will exists in one way or another. All will do a better job and all will charge about the same – even the Free.

  • http://www.rangl.me Michael

    I wonder what investors think of a startup willing to pay hundreds, or thousands of dollars to pitch at such an event. Might they think that the startup is a bad investment because they don’t know how to manage their meager funds on a long-shot, or perhaps they’ll like the entrepreneur’s “the ends justify the means” attitude?

  • http://www.commonangels.com James Geshwiler

    Michael: I view it a negative sign on sales skills. Why pay for an event, wait for it to occur and risk commoditizing your company when you can connect with investors much more easily these days than any time in the past.

  • Ben Kirk

    I’ve posted about this issue before on TechFlash.
    http://www.techflash.com/seattle/2009/10/angels_to_charge_or_not_to_charge.html

    I’ll add one thought: Does the presenter secure funding?
    If YES: Then, ultimately, who is paying the fee anyway? Investors who are concerned the fees are too high for the value added and thus negatively impacting the value of their investment should avoid such forums.
    If NO: Then perhaps it is an appropriate penalty for not being ready and an appropriate fee for finding out why.

    However, what concerns me is Angels running the risk of acting like mini-VCs by virtue of greater funding requirements as VCs pull up the ladder…we shall see.

  • http://www.ibreakfast.com Alan Brody

    In a perfect world great ideas would attract instant funding. Sometimes they do. Mostly they don’t.

    Angels are not God – they miss things. Not every MVP made the first draft. For that 99% of the companies falling into this category they are going to have to expend effort or money – or both – to get the word out to investors.

    If you have an oil drilling or biotech device start-up and some interent concept with revenues, then spending money might be worthwhile. That’s a value judgment call but to describe it as inherently evil is ridiculous.

    Yes, someone winds up paying the cost of seeking the money – but even though it is factored into the investment it ends to come out of the entrepreneur’s hide. Then again, if they get funded, it was worth it. If they didn’t, everyone starts to look like a crook.

    As for the investors sniffing at the idea that if someone had to pay to get the idea to them it must be an inferior idea, that seems intuitively reasonable. But is that necessarily true? Is a BMW Boxter worth less because an ad brought it to the VC’s attention just when he was thinking of buying a Porsche? And who wound up paying for that ad – in the long run?

    Shakespeare once said – “a good wine needs no bush.” The bush in this case meaning a banner outside the tavern boasting about the wine. Maybe that was true when there weren’t that many taverns or wines. But is sure is different today!

    Angels tend to look for certain things. If you are not the lucky one in that search you may have to consider paying someone for the opportunity to make those investors think differently. That’s the real discussion – what is it worth and who offers the best deal…

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