Revolutionary Angels Defends Business Plan Competition Amidst Widespread Criticism
A post last week on the New York Times’ “You’re the Boss” small business blog examined the phenomenon of business plan competitions with high entry fees, with the focus largely on Revolutionary Angels, a Cambridge, MA-based competition we profiled in early October. The post questioned whether the $4,995 entry fee that Revolutionary Angels charges companies to participate in its competition—which has projected prizes of $300,000, funded by the participants’ own fees—is a good investment for the typical cash-strapped, early stage startup.
“Five thousand dollars is about the cost of one business course at a top university,” Jill Kickul, who directs an entrepreneurship program at New York University’s Stern School of Business, told Times blogger Lora Kolodny. “Can a competition deliver enough mentoring and coaching to be worth that money? Any more than $5,000 sounds like gouging entrepreneurs, to me.”
That echoes some of the skepticism we heard after our October story on Revolutionary Angels. And the Times piece has sparked a new round of critical comments. Seth Levine, managing director at Boulder, CO-based venture capital firm Foundry Group and a principal at Mobius Venture Capital, wrote on his own blog that “There is no circumstance in which entrepreneurs should pay to pitch their business to prospective investors. Period. End of story.” (Actually, the whole statement was capitalized.)
Levine went on to call Revolutionary Angels’ contest an “underhanded hustle” with unjustifiably high fees. “The fact that more than 100% of their investment dollars come from the entrepreneurs they are supposedly helping out makes it even more pathetic,” Levine wrote. He went to argue that if an angel group doesn’t have enough cash to fund startups out of its own pocket and bear the overhead costs of running an investing operation, “then you’re not rich enough to be an angel investor.”
Many other members of the venture-capital tribe have come down on Revolutionary Angels and other investing groups that require fees before reviewing business plans. Shawn Broderick, executive director of the Boston version of the TechStars venture incubator program, blogged in response to our October piece that he has “an allergy to anything that consumes precious start-up capital that does not generate product progress, customers, or revenues.” Mahalo CEO Jason Calacanis, Brad Feld of Foundry Group, and Fred Wilson of Union Square Ventures have all come out publicly against the “pay-to-pitch” model.
After Levine’s response to the Times blog post, I contacted Revolutionary Angels founder and CEO Chris Hurley to ask for his response. Hurley says critics of Revolutionary Angels seem to misunderstand the organization’s entire model—from the nature of the competition to the services rendered to the reasons for using the entry fees to finance the prizes.
First, Hurley says the Revolutionary Angels business plan competition isn’t a marketing-oriented “pay-to-pitch” program like the DEMO technology conferences, the other example mentioned in the Times post. Rather than simply listening to a pitch, the Revolutionary Angels panel members are acting as consultants, Hurley says.
Second, every startup that enters the competition “gets support and help with their business plan and their strategy,” Hurley says. “We’re really trying to give them the benefit of experience from entrepreneurs who have been there and done that.”
In fact, Hurley says that benefit would be worth the $4,995 entry fee even if participants had no chance of obtaining an investment (envisioned at $250,000 for the grand prize winner and $50,000 for the runner-up, with a 10 percent equity share required in return). “We woudln’t have done this if we didn’t think they were getting their money’s worth,” he says.
Third, Hurley argues that there’s room for more than one approach to startup investing. He thinks traditional angel and venture groups ask for more equity—and require greater investment returns—than many entrepreneurs can realistically provide. By funding Revolutionary Angels’ investments from the entry fee pool, he says, the group has the ability to invest in startups that may never provide returns on the scale angel or venture investors usually expect.
“What we tried to achieve with our model is to make sure that every single entrepreneur gets help with their business plan, but also to change the dynamics of the funding,” Hurley says. “Just like a traditional investor, we’re looking to invest in successful companies and entrepreneurs, but because we’re taking the funds that we’re generating from the competition and using those as the investment dollars, that gives us more flexibility. Standard venture capitalists and angel investors are working either with their own money or they have limited partners who have put money in, and those investors expect a certain rate of return. There are lots of companies that may provide a 3X to 7X return rather than a 20X return—does that meant they shouldn’t get funding?”
Hurley continues, “I certainly understand the venture model. It’s worked for a long time. It doesn’t mean there isn’t room for other models to support more entrepreneurs.”
Hurley also has a response ready for venture and angel investors like Levine who argue that they’ve been working to make themselves more accessible, and that there’s therefore less need for entrepreneurs to participate in programs like Revolutionary Angels. (Levine writes: “If you’re looking for ‘access’, try emailing me, signing up for my community hours or my partners Brad or Jason’s community hours, or any number of other credible VCs that are increasingly more open with their time.”) These investors don’t understand the scale of the demand, Hurley says. “If people think everybody has access to experienced entrepreneurs, that’s just not true,” he says. “In my talking to entrepreneurs, not enough of them are getting access to the people who have been there and done that. There is a much larger pool of people who aren’t being served.”
The debate over the role of paid business plan competitions in the startup world will no doubt continue. Meanwhile, there are signs that Revolutionary Angels’ first competition isn’t gaining traction quite as quickly as Hurley originally hoped. He told me in October that the group hoped to sign up 100 competitors by October 31 and hand out the first $300,000 in prizes in November. But the group has extended its application deadline to December 31, and now says a prize ceremony is planned for January 15.
The first competition has been attracting entrants, Hurley says, though he did not say how many have signed up so far. He added that it may not be necessary to gather 100 entrants in in order to provide first and second prizes of $250,000 and $50,000; the group could still give out prizes of those amounts by reallocating some of the money allotted for overhead expenses, he says.
“With a new model, it takes a little bit more time to explain things to folks,” Hurley says. “I’ve been talking to a lot of entrepreneurs, and we’ve definitely had a positive reaction, but it takes time to help each entrepreneur understand how we work and what each entrepreneur is going to get through the process.”
[Update, 12/1/09: Seth Levine at Foundry Group has posted a lengthy, point-by-point response to Hurley’s defense of the Revolutionary Angels business model.]