Business Angels charging startups to pitch? Zero sum game.

by | Mar 4, 2010 | Events, Financing

Turns out there are groups of Business Angels (BA’s) out there that charge entrepreneurs and startups to pitch. What? Yes you heard that right, Angels charge startups to pitch. These fees range anywhere from €1000 to €18.000 + 3{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} of the capital raised to pitch your company to a forum of Angels.

What do you get in return? A fifteen minute slot in front of people that may, or may not invest in your company. Nothing more. Is the price tag worth it? Absolutely not, no angel should require the entrepreneur to pay a fee that will go into their own pocket. These people are after all supposed to be financiers, they are the ones that have the money, not the other way around. Notwithstanding 15 minutes of someone’s time, and especially if they were to have a vested interest in a company is not worth the money.

They will tell you, it’s for screening purposes, they will tell you it’s for x, y, z, but at the end they’re looking to take an equity stake in your enterprise – which according to normal investment criteria should bring them 30x return. Given not all will, but a well differentiated portfolio ought to at least bring in 10-15x return on investment.

Greed, Greed and More Greed?

So why are they charging? Long story short, it’s greed. But it’s not only the angel, there are groups out there that say they will put you in touch with BA’s for a few grand of your “lifeline support system” – basically those few grand that could mean life or death while your company traverses the valley of death. Nonsense. If a filter group wants to earn money through deal flow facilitation there are better ways of doing it than charging the entrepreneur for a fifteen minute slot.

A filter should be paid by all means, no work should go unrewarded, but how? Via percentage of the deal they set up, and a fee – paid for by the BA, and if the startup gets financed from the investment amount.

For example, Joe Filter, finds SuperSatrtup and introduces SuperStartup to BA – BA agrees to pay X for the introduction to Joe Filter, and then after some deliberation BA invests 300k in SuperStartup, due to the positive outcome Joe Filter takes 3{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} investment fee, or 9k. What do you have as an outcome, Super Startup is happy, as they now have 291k in cash for operational and growth activities, the BA is happy as the BA has a new high growth company in his/her portfolio, and Joe Filter is happy as he’s made some cash. BA = Expected 30x, Joe Filter = 9k+Intro Fee, SuperStartup = Investment, or Win, Win, Win.

If the startup has to pay Joe Filter, and no deal happens, It’s BA = 0, Joe Filter = 1, Startup = -1; or Null, Win, Loss, zero sum game. Or in layman’s terms – just bad economics.

So what’s this all boil down to? Greed. Once again, BA’s are more concerned about themselves than the nature of their business, and filtration systems target the wrong market segment. A “good” BA should have a vested interest in seeing the startups they want to see, as they will be investing in them, they should also then have a vested interest in helping these startups grow. So what does this all mean? Those BA networks that charge the entrepreneur a grand aren’t worth speaking to, especially since the “best possible outcome” is an equity stake in a company.

Any Value Added?

Is there any value added to the Entrepreneur? Nope. Typically, you pay, you pitch, you get rejected, or if you build interest, you’ll wind up covering additional fees. Then you have new funding initiatives such as Revolutionary Angels – that charge 5k to participate in what is effectively a business plan competition that results in two companies receiving 10{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} and 2{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} equity investments from the group.  But here’s the rub, that equity investment comes from the coffers of other entrepreneurs. An excerpt form their website reads “There is no obligation to submit a plan for review. Companies that are a selected to participate must pay a fee of of $4,995.” – Why do I have the feeling that if you’re willing to dish out 5k, you’ll get selected any way?

Dodgy business practices. By all means?

Value Added Service Fees?

This is different, if as a startup I can get some form of value added service – be it training, non equity mentoring, press, access to a new network, feedback on my business model, where it needs adjustment, how to extend my scalability, how to enter new markets, advice on joint ventures, learning and or education about the process. Then a fee is worthwhile, after all people putting these things together need to eat as well, and as we all know money does not grow on trees, but that value added has to be worth the fee in question. Is that fee worth €18.000 +3{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686}, absolutely not, is it worth €1000, probably not. Is it worth €100, depends what the service is, and how it will help me as an entrepreneur, but then at the end of the day, it’s a service and not an intro fee, or a 15 minute slot in front of me and my network for a grand.

In summation any BA network charging you for 15 minutes of their time is not worth it. If your company has mettle, BA’s in their nature should be more than willing to speak to you about your enterprise.

To read more about the topic of BA networks charging, click here, here, and here.

——————————

We want to know what you think?

This topic is of very special interest to us at F3FUNDIT, why? Well we’re in the process of putting together a new concept event that will truly be focused on the entrepreneur, yet we plan on charging a nominal application fee along with it. Why? Well we need to pay our staff, we need to pay for parts of the event, speakers, training materials, and our time, as well as put together a winner take all cash prize.

We’re not ready quite yet to let the cat out of the bag, but every startup that applies will get something in return, we’re on the side of the entrepreneur and don’t believe that something for nothing should exist, but nonetheless, we’d like to hear your thoughts.

Who should pay the fees, Startups or the Investor?

by | Feb 11, 2010 | Financing

BY F3FUNDIT

Who pays the fees, should it be the startup? Most Investors will tell you yes. Or should it be the Investor, which most startups will simply expect. The story is however that is depends on a number of factors.

What are hose factors and how do you know who, when, how, why, what, where, and huh? Well that’s why we’re here to help navigate some of the murkier waters of your startupedness. With that, first thing’s first. You need a solicitor (attorney, lawyer), someone you can trust and who knows the corporate side of things, remember each country’s laws are different so if your an S.A. don’t get a lawyer do deals with Ltd.’s. In terms of getting one, network, network, and then network some more.

Now that you’ve got a solicitor, you can go and start talking about financing. If you were introduced to a BA by someone, chances are they’ll want a finders fee, this can range anywhere from 3% – 10% of deal size, and in some extreme examples has even hit 15%, mostly the % will be a +/- 1% of the market you’re in. Spain averages on the lower side of the spectrum, whereas the UK is on the higher side of it.

Aside from this you’ll have legal fees – issuance of new shares, dilution of your own, and even if you do have an MBA, all this will undoubtedly still be confusing at the onset, add to that a finders fee for a facilitation intermediary if there is one, hourly solicitor rates, administrative expenses, filing expenses, etc… etc… and with a seed investment of say €100.000, those bills can quickly add up to 10-20% of the total investment, and all of a sudden your 100k that was supposed to take your co. international looks like it just might flop on its bottom.

So who pays the fees? At the end of the whole fiasco it’s both of you. If the startup pays from invested capital, it’s really getting a fraction of that invested capital, and if an angel pays then that angel is throwing that money away ontop of the investment. Likewise, if the money comes out of company coffers it’s pretty silly as that cash is inherently dedicated towards operational expenses. In which case if you’re lucky enough to find yourself with a willing investor, we recommend the following.

When dealing with an angel be up front about the fees and additional costs, if you need 100k to get to operational business level 2, find out before hand what fees and additional costs will come into play.

Now, say you do need that investment of 100k into your company to bring it to the next level, fees will be 10% meaning a total 110k for the cash transaction. That 10k will go to lawyers, administrative expenses, what have you, and is a sunk cost, no ends or buts about it. But aside from the lawyers who can benefit from it? The truth is the investor more so than the startup. Why? Because many nations in the EU, (mind you not all, so be sure to look at your local laws) – offer a tax shield for business angels. Meaning, that if I as a business angel invest 100k into company X, I can write of 10-20-30% of that investment off of my taxes for the year of investment, additionally, if the company fails, I may be able to write off an additional say 20%, thus decreasing my risk and making my investment contribution a fraction of the actual sum.

In which case, if you can write off that 10% in year one per se, the investment on behalf of the angel would really be 99k instead of the equity for cash injection of 110k. That shield does not apply to the startup, and your law / admin fees will go on your books as just that, the are not depreciable, the are sunk costs that eat up your cash.

So the next time you find yourself at a round table with a few BA’s or are a BA yourself, just remember that there are numerous things you can do to lower your risk in any new venture. It’s not just about investing, it’s about doing it in an intelligent manner.

Pin It on Pinterest