Raising Capital Costs Money and Time
If you are new to the startup space and Angel investing, you probably don’t realize that some groups of Angel investors charge entrepreneurs a fee to pitch to their groups. This practice has caused a rousing debate among key players, with some calling it a scam, and others defending it as necessary to cover expenses.
Jason Calacanis, a well-known entrepreneur and angel investor, opened the debate a while back in a strongly-worded article on his blog which attacked the practice on ethical grounds, and called out popular Angel groups charging fees ranging from several hundred dollars to $5,000 or more. He calls these a scam, and “Angel group” payola.
Others, including noted Angel David S. Rose, founder of the New York Angels and Gust, have spoken out in defense of the practice, at least for smaller amounts, commenting that, aside from covering expenses, it also provides a degree of “filtering”. In reality, these fees are usually trivial compared to your real costs of preparing, traveling, and presenting to investors.
While I’m definitely a proponent of full disclosure to prevent surprises, I see nothing wrong with experienced investors charging a fee for listening and evaluating startup proposals, and providing feedback (or funding) to entrepreneurs to help them achieve their objectives. Lawyers and other professional consultants have done this for generations.
I have long recommended that entrepreneurs do their own “due diligence” on potential investors and Angel groups before they waste their time and hard-strapped funds, and here are some additional thoughts for entrepreneurs thinking of paying to pitch their case to investors:
- Be realistic about expectations of funding success. According to the latest data from Gust, only about 3 out of 100 companies who initiate the formal funding request to Angel groups actually get funded. Entrepreneurs who expect to get a hit the first time (or first five times) they pitch their story cold are likely to be disappointed.
- Improve your odds by networking and warm introductions first. With the rise of social tools, potential investors are increasingly more accessible outside the pitch room. If they know you by a warm introduction from a friend well before the pitch, or you have one or more advocates in the room, your odds of success go up dramatically.
- Evaluate feedback from individual investors first. If you have been given private introductions, but the investors declined to hear your pitch, don’t assume that paying money or presenting to larger numbers will solve your problem. There is probably a fundamental problem with your business or how you present it. Find and fix that first.
- Weigh the cost against the track record and “reach” of a specific Angel group. A fair question to ask any Angel group, fee or no fee, is “What is your track record of funded investments, versus the number of pitches?” Spending $1K to get $1M is usually better than spending nothing to get nothing. Does their “sweet spot” match your type of business?
- Consider your startup stage. If you’re at the seed stage with young, first-time founders, and think you’re ready to raise some capital, your odds of funding success are so low that I would skip the fee alternatives. On the other hand, if you have solid revenues, good growth, and need to scale faster, it may be worthwhile to get to the best Angels in town.
- Don’t wait until you are desperate. Investors can spot an out-of-money entrepreneur a mile away. They won’t even notice that you are angry because you had to pay for the opportunity, and they won’t fund you on principle since it doesn’t appear that you can manage your plan very well.
I’m convinced that most Angel investors are not out to squeeze a dollar from poor cash-strapped entrepreneurs, as implied by Jason. They are, however, always looking for better ways to make use of their time, and quickly find the entrepreneurs who have the best case and the least risk. Their only real gain is from a win-win situation, and it’s up to you to take the right first step.