The Price of Money (At Least You Can Eat Catfish)

30 OCT 2009

As bottom feeders go, catfish are the best eating. Fried in bread crumbs they make a good meal. I cannot say the same for the people who prey on nascent entrepreneurs and young startups.

The defense these networks make is two-fold: that they provide support before the event and that they are really corporate finance specialists. As I mentioned in Part 1 of this series, I will only believe an entities’ assertions, implicit or explicit, that they are serving the corporate finance role, if, when they present themselves to the public (ie their website) they show the tombstones of prior deals. Tombstones, as you may recall, are the list of their prior funding successes which would be in their self interest to promote to persuade new potential customers to work with them. Of course if their hit rate of prior funding successes were very low they would be inclined not to be so transparent as it would put entrepreneurs off from paying them a fee. It is, to me, the bellwether indicator: are they bragging about success or hiding failure?

An example of a worthy angel network is Pi Capital run by David Giampaolo. Pi Capital does not take a fee from the entrepreneur because Giampaolo views it as an inherent conflict of interest.  (www.picapital.co.uk) Not surprisingly, Pi is quite candid about their successes. More to the point it serves as a reminder that there are business models for intermediaries to run a successful business marrying angels and opportunities without charging the entrepreneurs.

Getting back to my original point though that angel networks provide essential training is also bordering on a scam. By tying the preparation to the money raising they are of course claiming that everyone needs it which is absurd and that their pricing because it is bundled cannot be directly compared to the same type of service provided elsewhere. Tying is the oldest game in the book. After all, if a company comes to one of these networks and despite preparation is still not investment ready, what do they do then? Not present them? They’ve taken their money…Welcome to the conflict of interest.

But of course this is the state of business support in the UK. We have firms charging to help young startups write their business plan. In fact they write their business plan for them. This is the antithesis of everything we believe at S4S. The entire point of a business plan is to document your thinking, analysis and efforts to discover in the real world your business proposition and model and cogently describe that to potential investors and partners. What possible purpose is served having someone write it for you? It’s like outsourcing childbirth or an orgasm or your birthday. It’s yours. It cannot be done by someone else. Even if you want to.

I am particularly galled by organizations that have managed to win contracts from RDA’s to help companies write their business plans. I know this happens because the unfortunate wretches end up on my doorstep, formulaic business plan in hand, clutched totemically in front of them as though, like a voodoo doll, it will ward off my evil questions.

Providers of such services may very well assert that startups need a great deal of help figuring out how to put their business plan together. I agree.

I agree, that is, if they mean that new entrepreneurs need help figuring out whether their idea makes a viable business and what sort of business it will make.

I agree if it means determining their capital needs and what sort of return that capital will make.

I agree if it means determining their pricing models and whether those prices support the sort of infrastructure their business will need to prosper,

Then sure they need help.  In fact, I agree so much I started School for Startups. What we are talking about is the need for entrepreneurs to be able to answer the key questions that will shape their business.

If they want to write all of their conclusions down in one place and neatly format it, then I guess they’ve got themselves a business plan.  But they could post it on a blog, or just get started on the business and that would make me just as happy. S4S is about teaching people what questions need to be answered and how to make sense of the answers they discover. It’s about being creative and realizing that businesses can take any form and that there are no limits. It’s not about writing the damn business plan.

But what about the business plan writing service that charges £1,000 and does the whole thing? Who is doing what for whom? Is this service going to run the business as well? Would any investor take any entrepreneur seriously who showed up with an outsourced business plan? Most professional investors have a dislike for corporate financiers because of the added fees and the implication that the company cannot present itself.  It doesn’t mean they won’t sometimes use them, but there is an underlying assumption that more due diligence needs to be done to ensure the company was not using the intermediary as a crutch to prop up their own failings.

If you are a startup you must realize that if it’s too good to be true, then it’s too good to be true. People will want your money, what little you have, and will say or do anything to get it.

Other articles on this site detail what I expect from an angel investor and how you the entrepreneur can spot a good one and a real one. Meanwhile if you have had a bad experience with a firm offering to write your business plan, let me know at info@schoolforstartups.co.uk.

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  4. Pingback: The Price of Money Part 4: Say No, No, No, No Till Your Tongue Bleeds | Doug Richard's School for Startups

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