Do Not Pay to Pitch Investors

Written by Sean Murphy. Posted in 5 Scaling Up Stage, Funding, skmurphy

Jason Calacanis has gone a little bit off the dial on “why startups shouldn’t have to pay to pitch angel investors” but he is nonetheless correct that you should not pay large fees to potential investors for consideration or the right to present.

Our focus is helping bootstrapping technology startups but we do get startups at the Bootstrappers Breakfast who ask whether they should “pay to play” as well as those that have. I have yet to meet anyone in a startup who was happy with the outcome after paying a large fee to present. And by large I mean more than $100. There are a number of pitch preparation groups in Silicon Valley (e.g. VC Task Force, SDForum VC Funding SIG, SVB Competition, Under the Radar, Launch Silicon Valley) that are worth exploring before you write a large check to an Angel group in hopes of getting a larger check back.

The Angel Capital Association issued some guidelines in 2008 you should bear in mind (bolding added to body of text):

ACA Guidelines on Charging Entrepreneurs Fees for Applications and Presentations

In 2008, ACA recommends that angel groups charge entrepreneurs no more than nominal fees for applying for and/or making presentations for angel capital and that all fees are fully disclosed, ideally appearing on the group’s Web site. The fees should be no more than a few hundred dollars for applications and no more than $500 for presentations. Transparency to entrepreneurs is of utmost importance, so full information about fee amounts and what the fees are for should be included on the group’s home page and/or other prominent portions of the site and other important promotional materials. Angel groups should also provide a consistent program of high quality coaching, preparation and feedback to entrepreneurs participating in screening and presentation activities.

These guidelines match the practices of the great majority of ACA member groups, based on a 2008 survey. About two-thirds of responding members charge no application or presentation fees, and the other third mostly charged nominal fees. [...]

ACA is an inclusive association that welcomes membership from any angel organization meeting the application criteria, but it does not endorse the practices of any group that levies large fees and/or does not forthrightly explain its potential fees to the entrepreneurial community.

Let me give an example from a Silicon Valley Angel group that I am familiar with: The Angels’ Forum. Here is what they say on their FAQ page for how they are different (bold added):

  • We are a small, stable and committed investor group with long history of investing together and low turnover. TAF only has 1-2 openings per year for new angels members.
  • All of our deals are reviewed and the due diligence is carried out by the angel investors, not by consultants looking for business opportunities.
  • Investments are always made via a single investing LLC.  This not only simplifies the entrepreneurs’ process but also protects our investing members’ privacy. The aforementioned TAF LLC will often lead the A round and be instrumental in bringing in venture coinvestors.
  • Entrepreneurs are not charged any fees to present, we don’t have “success” fees or any other fees for that matter.
  • TAF only invests in Northern California headquartered companies in order to devote sufficient attention and resources to the management and encourage their success.

Sometimes engineers feel that it would be more efficient just to get all of the possible investors in one room, make a single presentation, and get an answer right away. It’s somewhat similar to the challenge of finding early customers, the presentations are entirely different and the negotiation dynamics are different, but the process of improving your presentation is very similar. In fact someone asked this question on a mailing list I am on:

Ask yourself which is better:
Scenario A): Spend 2 weeks preparing biz plan/ppt/talk and $3,000 to present to 40-50 angels
Scenario B): Spend 20 weeks and $1,000 (coffee/lunch/gas/printing) and talk 1:1 with 20-30 angels

If you get feedback from each (or most) of the 20-30 angels on an individual basis that you use to improve your plan and your presentation then the 20 weeks is well spent. It’s not clear from your hypothetical situation whether you are able to make progress on your business in the absence of funding, but assuming that you can taking a retail approach (selling one by one vs. “wholesale” trying to sell all of them at once) allows you to improve your presentation and increases your odds for success substantially.

Look at it another way, let’s say that there were still two or three things missing/wrong from your presentation to the group of 40 Angels, what are your chances of being able to approach them again once they have heard you once. What are the odds that you will get feedback from more than a handful of them in a group setting? Talking to 40 at once seems more efficient of your time but it has a much lower chance of success than 20 or 30 sequential presentations–providing you take the time to get feedback and improve your presentation as you go, if you give the same presentation to the 20th as you gave the first you are wasting your time and the time of your potential investors.

Update Mon-Oct-12: following up on a comment left by Benjamin Kuo on an earlier post by Jason I came across two good posts by Joe Platnick of the Pasadena Angels, (I have highlighted some key quotes from each).

  • Angel Investors – Do They Charge Fees?
    • The best Angels make money the old fashioned way—working with entrepreneurs to generate investment returns upon exit
    • “Some reputable Angel organizations charge a nominal fee (~$50-100) to submit a funding application. The intent here is not to use this as a money making opportunity, but to provide a filter or sincerity test for the entrepreneur and to reduce the number of poor and incomplete business plans (aka junk) that get submitted.”
  • Friday Random Ramblings
    • “These pay-for-play scams remind me of the “modeling agencies” that charge people for representation, acting lessons and to have their headshots done.”
    • “Beware of for-profit angel groups based on a franchise model–as those are typically the ones that charge companies. If they don’t make money the old fashioned way and exclusively through investment returns, then they aren’t worth talking to.

Brad Feld, a VC with the Foundry Group, weighed in on this topic August 24, 2009 with “An Angel Investor Group Move That Makes Me Vomit” offering some key points to consider”

  • “I’ve personally made around 75 angel investments during two periods of time – 1994 – 1997 and 2006 – 2007.” [For details read the full post].
  • “I give you this background so that my statement below has some credibility.  I think it is grotesque that an organized angel investor group would charge an entrepreneur to present to their members.
  • And many of the members of organized angel groups aren’t actually angel investors.  I’d like to suggest that to “qualify” as an angel investor, you have to have made at least one equity investment of at least $25,000 in the past 12 months.  If you haven’t done this, you can’t call yourself an angel investor.

Update Tue-Oct-13: Jason Calacanis has posted a follow-up in “and now for some smoking guns (or part two of angels that charge)” that has a number of sourced comments on the problem. Worth reading, it’s written in a more temperate voice.

Update Tue-Oct-20: Bob Crimmins  left some very insightful comments on a Keiretsu Forum member’s website; here are some key excerpts but the whole set of his comments are worth reading:

“While I don’t fully understand the inner workings of Keiretsu, what I think I have learned thus far is 40%- 50% (huge numbers) of the startups that pay significant fees to Keiretsu get no funding.”

“In fact, I believe that Keiretsu’s incentives would be more properly aligned if they did have a stake in the outcome of the startups they represent. As it is, they have no incentive to ensure that every startup they put in front of their cadre of investors has a better chance than a coin flip of getting funded. [..] For example, Keiretsu could only take fees from startups who actually get funding, i.e., a success fee.”

“I would support a pay for performance model where the angel aggregator group only gets paid if they are successful in making a good match between their investors and the companies they charge fees to–no funding, no fees. Charging, say, a 2% – 4% success fee is utterly reasonable and in this scenario, the angel group has it’s incentives aligned with the startups and the investors, i.e., to make successful matches between entrepreneurs and investors.”

Update Tue-Oct-20 (more): Deborah Gage at PE Hub reports that “Keiretsu Forum to Drop Fees For Early Stage Startups” part of their Keiretsu Forum Thread.

Williams said the change is not a response to the recent attacks on the fees launched by investor Jason Calacanis [...] but have been in the works for several months. Keiretsu also has no plans to drop fees for other entrepreneurs.

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