Angel Networks that Charge Startups :-(

Comments

1. Ben T says:

   October 12, 2009 at 6:03 am

   If you agree with Jason, don’t you think you should remove the links on the right to the AAAI and the Melbourne Angels?
2. Erik Unger says:

   October 12, 2009 at 1:39 pm

   That’s true, but I consider them as serious business partners because I have met some in person. They are also active in supporting events for entrepreneurs, whereas the other networks are not present at any events and look much more like online scams.

   Here is the statement from Melbourne Angels:

   “Apologies for the $150 application fee which we have found necessary to filter out frivolous submissions. This means that your application is not mired in a morass of meaningless submissions and it means that we can give your application the time and consideration it deserves. This is the only time that Melbourne Angels will ever ask an entrepreneur for money.”
3. Erik Unger says:

   October 12, 2009 at 2:30 pm

   A VC on Paying To Pitch:
   http://www.avc.com/a_vc/2009/10/paying-to-pitch.html

   “Both the agent groups and startup agents that want to charge upfront cash make the argument that it is a quality filter. But that is nonsense. Some of the best startups I’ve ever seen were totally broke and living and working in a friend’s apartment. And some of the worst were well off and working in fancy offices. The ability of a startup to pay has absolutely nothing with the quality of the team and the idea.”
4. Jordan Green says:

   October 12, 2009 at 5:42 pm

   The rant from Jason Calcanis is well understood and the vast majority of Angel investors with whom I am acquainted here in Australia and overseas would certainly agree that entrepreneurs should not be charged by investors to present to those investors.

   Someone like Jason discovers this “injustice” every couple of months and there is a new round of blog flurry about this outrage. Don’t misunderstand, I agree that the practice he describes is wrong, as do most angel investors. What’s more, if he had done a little bit of Googling before venting his rage he could’ve been even more effective by linking to other such blogs/articles, e.g. this one from an Angel/VC (http://www.feld.com/wp/archives/2009/08/an-angel-investor-group-move-that-make-me-vomit.html) which includes responses from some very successful Angels (several that I know personally). Another Angel blog that addresses this issue can be found at the bottom of the page here (http://pasadenaangels.com/blog/?m=200903). Also note the comments on YCombinator (http://news.ycombinator.com/item?id=872635)(here too http://news.ycombinator.com/item?id=782980) that also reflect this is far from a new topic, without meaning to belittle Jason’s outrage in any way.

   Keiretsu, Business Angels Pty Ltd and others are not Angel groups. They are fee-for-service businesses that charge both angels (investors) and entrepreneurs to bring the two together. Such match-making events are notoriously ineffective for everyone other than the service provider, a key reason why they are not a significant feature of the landscape in Australia – one example would be the BSI Forum (http://www.bsi.com.au/raising-capital.aspx) which only charges the entrepreneur and has led to some successful investments but, BSI is very openly/honestly a service provider/investment banking type exercise.

   As for our own practice at Melbourne Angels of charging a submission fee to filter – not a fee to pitch. There are generic comments on this here (http://angelsoft.net/blog/2008/07/15/why-do-we-charge-250/) which I think you will find very similar to my own explanation posted by Erik above.

   Essentially, without this filter we will spend precious time doing the filtering and the legitimate entrepreneurs do not get the consideration and attention that they deserve because the time is not available. Please keep in mind that the rule of thumb is that an early-stage investor touches on 100 deals to find the one which is right for that investor to invest. That’s a lot of time the Angels are giving without any expectation of reward other than finding the gem that is a great investment. Indeed, I have had quite a few entrepreneurs tell me that they will submit their opportunity to us specifically because of the fee because they say they know that their opportunity will not be lost in a mass of frivolous submissions.

   The submission fee is not seen as revenue, nor is it a substantial contribution to the costs of operating the Angel group. Most often it goes towards the costs of being involved in the entrepreneurial community where we work hard and give lots of our time to make a contribution of value to all entrepreneurs whether they are our investments or not. Most Angels are themselves experienced entrepreneurs and we know exactly how hard and time consuming it is to chase investment so, the last thing we ever want to do is waste the precious time or very limited cash resources of entrepreneurs approaching us. We endeavour to treat entrepreneurs the way we would’ve liked to have been treated when were in their shoes. If we fail at that then do let us know because that’s the only way any of us can improve.

   That said, if Erik decides to take down the link to Melbourne Angels because of the fee that is his right and we will not be angry with him, nor raise any complaints – hey, it’s his web site/blog.

   Hope these links/references have been useful in addressing this issue for you. Let me know if you need more.

   Other, similar practices of which entrepreneurs should be cautious/aware include the ‘Collins Street’ (substitute your local financial district) advisers who claim to be private equity firms, or represent investors when offering to secure investment for entrepreneurs. These advisers/firms typically say they will conduct due diligence required for the investors they represent but, require the entrepreneur to pay for the due diligence, often at high rates like $40,000-$60,000 – this practice is so far from the truth and so close to theft that I am always amazed that the practitioners can say it with a straight face, or avoid prosecution from the authorities.

   A sometimes troubling but, more authentic practice is the common policy of VC firms and some other early-stage investors to capitalise the costs of due diligence by requiring the investee company to reimburse the VC the due diligence costs after the investment has been made. There are some valid, if not entirely necessary, reasons for this practice related to the institutional investors behind VC.

   The world of fund raising is rife with pitfalls for the unwary.
5. Rachel says:

   October 13, 2009 at 3:28 pm

   Hey,
   I read Jason’s blog earlier this week and found it really interesting and made me feel a bit vilified on some of the decisions we have made with IPitch to not charge startups or investors for the immediate future. We toyed with these idea…should we ape Wholesale Investor and charge the startups or ape Sydney Angels and charge the investors (and the startups for that matter.) In the end we decided to let it be a free directory, both to list and to search, and our business model is to create a community site based around the Australian startup scene and then find service provider partners that offer IPitch exclusive flat rate legal services, startup friendly accounting, design work, marketing etc. It seemed like a mutual win for service providers, IPitch and startups. I think the money is like a downpayment on how serious you are about the opportunity, but I know it also can eat away at the budget of a bootstrapped startup. Hopefully some of you who have felt shut out by the charging angels groups will find some useful exposure at IPitch.com.au
6. Erik Unger says:

   October 15, 2009 at 11:12 am

   Jason has now written a follow up posting:

   http://calacanis.com/2009/10/13/and-now-some-smoking-guns-or-part-two-of-angels-that-charge/
7. Erik Unger says:

   October 23, 2009 at 2:42 pm

   There is now a related posting on TechCrunch: “The Angel Empire Strikes Back – Why pay-to-pitch works” http://eu.techcrunch.com/2009/10/22/the-angel-empire-strikes-back-why-pay-to-pitch-works/