Business Angels charging startups to pitch? Zero sum game.

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.

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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.

Understanding the Startup Financing Process

The 3F‘s, Seed Capital, Angel Capital, Venture Capital, Series A, IPO‘s sounds familiar or does it?

Many budding entreprenerus, and especially those without a background in finance, and even those with a background in finance won’t really understand how the startup financing process functions.

Or more adequately how you go from cracking open your piggy bank to issuing shares on the DAX, or any stock exchange for that matter.

But first thing’s first, your 3F’s are your Friends, Family and Fools, and they’re the only ones willing to donate some money to your cause, friends and family, cause they care, and fools, cause well only a fool would give someone they don’t know cash.

Next up you’ll get seed money, these are typically people who want to flip their equity within 6 months, quick in grow the company rapidly, and quick out strategy.

Next up, are the BA’s (Business Angels) – who invest on the basis of 30x expected ROI.

These three groups comprise the “Valley of Death” in your startups life, basically meaning, these are the moments when your company either 1. Does, or 2. Dies.

Once your company’s out the red, and has broken even, this is where early stage VC comes in, typically Series A, then Series B for early stage, C for early late stage, etc… etc… and if you’re lucky enough, you get the company to issue an IPO, or Initial Public Offering meaning that the shares of your company can be traded on stock markets such as NASDAQ, DAX, etc… but when you get here, you’ll have a Morgan Stanley underwriting your deal, you may be going through a M or A, and all sorts of crazy things can happen to you so for the basis of this site, our database, and resource we’ll stick to the early stuff. For a visual representation of this entire process check out the really amazing graph, thanks of Wikimedia, and a bit edited by us.

Startup Saturdays: CFI Partners

This Saturday we would like to introduce you to CFI Partners, a crowd financing platform recently started by a couple of IMD MBA’s. What we find specifically interesting in CFI is their alternative approach to financing startups, it’s new, novel, and it’s taking a risk, it’s what we believe any startup should be, so without further ado, this week’s Startup Saturday: CFI Partners

How did you come up with the idea to crowdfinance?

Imagine the number of missed opportunities that are overlooked or can’t be addressed by the more traditional mechanisms of financing such as private equity and venture capital.

We ourselves saw several cases where entrepreneurs had a great idea but were unable to get past the initial seed funding, or where there idea had a potential for generating strong revenue, but not on the scale that would interest venture capital.

There are several reasons for this, the difficulty of evaluating each opportunity, the cost of the transaction, and the fact that risk capital is not as well developed in Continental Europe, let’s say in comparison to the US. These factors create a threshold where investment opportunities under <$2 Million are uneconomical for traditional venture financing. Furthermore, with more and more of the funding for venture capital and private equity coming from big funds, there is an increasing trend for larger investments.

With crowd financing we democratize the process and make it more efficient. The amount of money that can be raised can be quite significant. If you look at the Obama Presidential Campaign, he rose over $400 million from individual contributions of $200 or less. So substantial amounts of money can be raised. But another aspect that makes crowd financing attractive is the fact that by decreasing the amount that needs to be invested, you open up the process to a whole new market. As this market is more efficient, smaller investments remain attractive. Thus crowd financing allows us to address an interesting part of the innovation market, the area of 50,000 € to 2 Million €, which is underserved at the moment.

Another factor that attracted us to crowd financing, was the chance to develop a community where the considerable power of sharing information can be leveraged. Members of our community will help develop entrepreneurial ideas with their feedback. Basically we will act to bring together the information latent in members of our community, leading to more efficient and we hope more successful investments.

Interestingly, we set out initially to design a platform with the classical technology innovation entrepreneur in mind. However, we have seen a strong demand from film makers, bands, and designers who feel that crowdfinancing could be the best approach for them to raise funds.

Any milestones that you’d like to share?

We started out developing this idea in November 2009, and have been working on refining and developing the concept. Understanding the market and who are our customers. At the beginning of 2010, we refined the website of our company to explain more our ideas and elicit some feedback.

We have been also working on getting feedback from both entrepreneurs and investors. These inputs are going into the development of our web platform for crowd financing, which we are scheduling for launch in Spring/early Summer 2010.

Another important aspect, of course, is raising funding for our own platform. A process which we have just begun.

Can you tell us a bit about the team?

Hervé and I met as classmates in the executive MBA program of IMD. We have rather different backgrounds, but high levels of experience. Hervé has a strong background in marketing and finance, having worked both in large corporations such as GE, but also for smaller startups. He not only has experience working for start-ups, but also has worked with private equity. Thus he has a good experience with both sides of the equation.

Myself, I have over 16 years of driving innovation in Biotechnology. Initially, leading research at top Universities (I have a PhD in Molecular Pharmacology from Stanford) and more recently working in start-ups driving the R&D program and supporting product development. I have a strong insight of the needs that start-ups have when it comes to innovation support. Hence, my excitement in supporting our project.

Any difficulties you’ve experienced in the startup process of your company?

I think what has been the most surprising thing for us is the speed at which the interest and demand has developed around this idea and our platform. Hence, the biggest difficulty we’ve had has been the lack of resources. Hervé and I are bootstrapping the company, while keeping our full time jobs, and still making time for our families. Luckily for us, we seem not to need a lot of sleep! ☺

But seriously, the lack of the time and limited financial resources has meant that we have difficulty keeping up with the pace of the project.

To make sure we capture this opportunity is why we are pushing to launch this spring.

Any advice to pass on to budding entrepreneurs?

Engage with other entrepreneurs about your ideas, they can help you develop your ideas and evolve them. To many times entrepreneurs keep their ideas to themselves and lose the power of other peoples input to convert their ideas into successful ones.

And Tthe next time you are considering fundraising, consider the power of using crowdfinancing. You can a get more details at our website. www.cfi-partners.eu and consider using our platform this Spring for your fundraising needs!

Researching  European Venture Capital

Researching European Venture Capital

You’ve got your business off the ground, you’ve secured some financing, you’re cash flow positive, and business is good. Great! But you need to expand into a new market and to do that you need cash, it’s time to start researching European venture capital.

Your 3f’s (friends family and fools) are all pretty much exhausted, and Angel Capital’s already been spent in your national expansion efforts. So now it’s either debt or venture capital…

And while we won’t go into the semantics of why we’re recommending a VC injection rather than debt acquisition (just yet), we’ll just say that this option is the better one for your business at its present juncture.

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Seeking Investment, Seed, Angel and Venture Capital

Seeking Investment, Seed, Angel and Venture Capital

You’ve been working for days on end, the business plan is more or less finished, you’ve started developing your product, and still putting some polish onto the conceptual side of things. You figure you can get the basics up and running, or simply put you’re at a wall, and the best way and only way to get over it is cash. You’re now officially seeking or looking for investment. 

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