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• 
• What Angel Investing & 1 Night Stands Have In Common
• 
• The Price of Money (At Least You Can Eat Catfish)
• 
• UK Startups are Prey for Rip Off Artists Disguised as Angel Groups & Financiers, says Doug Richard
• 
• The Insanity of Angel Investors
• 
• The Dirty Secret of Credit For Small Business: the Failure of the EFG Scheme
• 

A couple of weeks ago an American blogger, Jason Calacanis, who is also an influential commentator on Silicon Valley, expressed outrage that some so-called Angel Groups were charging entrepreneurs for the opportunity to present their companies. Jason wrote,

“Why it’s wrong to charge startups to pitch =========== I’ve been in the startup scene since 1994 and in those 15 years I’ve met, interviewed — and in some cases, pitched — the most powerful investors in technology. None of them have ever charged me a dime for doing so. Why? BECAUSE THEY ARE RICH!”  (http://calacanis.com/2009/10/09/why-startups-shouldnt-have-to-pay-to-pitch-angel-investors/).

Just to be clear, I completely agree with Jason, start-ups should not be charged to pitch their businesses to angel investors. What struck me about Jason’s very strident blog is how astonished he seemed to be that such un-ethical activity existed and, secondarily, I am quite sure that he is wrong about why they should not charge. It is not because they are rich, but rather because they have all the bargaining power and further, if they are indeed actually angel investors then it is not in their self-interest.

Money is in scarce supply and it creates a very imbalanced marketplace. Charging entrepreneurs to pitch merely because they can is not an adequate reason to do so. Moreover most angel groups that actually want to create successful investments know that it is not in their self interest. When I started the Cambridge Angels (http://cambridgeangels.angelgroups.net/) with Robert Sansom in 2001 we took the decision to only charge the other Angels and never to charge the entrepreneurs at all. This extended well beyond a pitching fee. Our reasoning then was that many start-ups had good ideas but no money and we would be arbitrarily denying ourselves valid opportunities because they lacked the very thing we were in a position to commit: money. Second, that if we indeed took money it would be difficult to turn away the opposite entrepreneurs: those with bad ideas and enough cash to pay a fee.

As it turns out, the commentary surrounding Calacanis’ blog supports our decision back then with one ex-employee of Keiretsu Forum describing the business as follows,

“Keiretsu recruited me directly out of college, yet I only worked for the company for about [REMOVED] months: the amount of time, I suppose, that it takes a reasonable and ethical person to come to terms with the reality of this scam…. These networks charge because they have to. They know that they have their business model upside down; I know that they know this because that was the first input that I offered to the head of one of the largest branches….Why didn’t Keiretsu charge the investor? Because no investor was willing to pay to be a member. While they say that they have membership dues (and other branches may very well collect them), I watched as a full year’s worth of membership dues went uncollected for the branch where I worked. When I asked multiple Keiretsu investors (off the record) what was up, they explained that, if they were charged even a cent, they would simply terminate their membership. And why was this the case? 3) Because Keiretsu attracted sub-par entrepreneurs, of course. For the exact reasons that you described. The goal, in any given month, was to have five entrepreneurs pitch, yet it was a rare month where we could dig up that many who were willing to pay Keiretsu’s fees ($7,500 to pitch at all four regional locations). So, in reality, we were essentially accepting anyone who was willing to pay.” (http://calacanis.com/2009/10/13/and-now-some-smoking-guns-or-part-two-of-angels-that-charge/)

I note with interest that Keiretsu Forums who have received much of the negative publicity in the US also apparently have a London chapter (http://keiretsuforum.com/frontend/ManageChapterSection.aspx?Page=Welcome&ChapterID=9) which is fascinating as I had never even heard of them prior to this controversy. I have sent them an email asking if they charge in London as well. I shall await their response.

One other UK group that was highlighted on the Calacanis site is Angels Den (http://www.angelsden.co.uk/) who apparently charge £800 to present. (http://calacanis.com/2009/10/09/why-startups-shouldnt-have-to-pay-to-pitch-angel-investors/)  Bill Morrow, the founder of Angels Den has vigorously defended his right to charge. He was quoted in the Guardian as saying,

“The base assertion that if you’re an angel, you should not be charging people to see you, is quite correct,” he said. “But there really has to be a distinction between those companies who actually have the capital and companies, like ours, who introduce you to people with the capital.”

“For £800 we help you write your business review, we spend half an hour on the phone with you, meet you, give you pitch training,” he added. “I’m happy to stand up and say that we genuinely believe that it’s a service for both sides – before we started the training or help you with a business plan, nobody’s getting funded.”  Asked whether it was fair to take a potential portion of funding away from young companies, Morrow said it was normal practice for European investment networks to do this – in fact, he said, many of his competitors demand much more for their services.  ”We’re slightly bemused that he [Calacanis] has chosen us, as we are by far and away the cheapest,” he said. “We’re the largest player, we’ve got the largest number of angels and we’ve got the most activity in the marketplace – but we’re also the cheapest. The number two charges £15,000 to pitch, a 5% success fee and then a 3% equity stake. The next biggest player charges £7,000 and charges a 5% fee.” (http://www.guardian.co.uk/technology/2009/oct/13/angelsden-funding)

Bill makes an interesting point but one that needs clarifying. But first I do not agree with him that prior to Angels Den nobody was getting funded. That is plain silly. Further I do not think that a 30 minute phone call and help with writing a business review is what separates the fundable from the unfundable. The final point I disagree with is that it is normal practice for angel networks to charge. Cambridge Angels don’t and have raised millions of pounds from its members and friends over its 8 years of existence.

In deference to Bill though, he does make a serious point. He is essentially differentiating between three activities: corporate finance, angel group investing and rip-off artists. In the first group are organizations that have rolodexes of people with money and who charge entrepreneurs to raise money from those networks. Corporate financiers usually charge a fee and a percentage of the money raised, just as Bill at Angels Den does. So to the extent Angels Den is essentially a boutique corporate finance house with a network of high net worth individuals then his business practices are no more or less legitimate than any of the other corporate finance houses.

But there are differences. Corporate financiers do not make their money on their fees, they make their money on the percentage they get of the money raised. And the “book” that they prepare is a time consuming, very professional document that is created to show the company in its best light and to also preserve the reputation of the corporate financier who is as worried about maintaining his money relationships as he is about any given entrepreneur. The evidence of their success is seen in the wall of tombstones that every corporate financier has on their site (See http://www.gpbullhound.com/trans.php or  http://www.cobaltcf.com/index1.php?page=track for examples). Their ability to raise money (or sell or buy businesses) is transparent.

Angels Den does not have that transparency. There are some case studies on the site but every money raising is not listed on the site. Given how radical a departure that is from customary practice it leaves one wondering how much money has been raised? How successful have they been? It is easy enough to remedy. If Angels Den is to be regarded as a proper corporate finance house then it should probably present itself as one and be very transparent about their successes to date.

I do not know who he is referring to who charges £15,000 or $7,000 for the right to pitch but I would assert on those numbers alone that they fall squarely into the third group: rip off artists.

I started this post noting that what astonished me about Jason’s post was how astonished he was. I am not. When I wrote the report for the Conservative Party on small business support and its effectiveness or ineffectiveness (http://www.bl.uk/bipc/pdfs/richardreport2008.pdf) I was struck by the number of bottom feeders in the marketplace who make their money by preying on insecure and inexperienced entrepreneurs.  If you know of, or encounter, businesses that engage in this practice, I hope you will let me know at info@schoolforstartups.co.uk.

Tags: angel investing, Articles, capital, credit, doug richard, entrepreneuers, finding investment, investment, investment ready, pay to pitch, venture capital