Angel Investors and Charging for the Pitch

Jason Calacanis is a very successful entrepreneur who is associated with some of the best known sites on the web. He is also an angel investor, and has recently taken other angel investors to task for charging startups to pitch their idea.

One of the first truisms anyone learns in the business world is that it takes money to make money. Even the best ideas need some seed capital to get off the ground. There are a number of ways to get this initial funding. You can exhaust your personal savings and go into debt. You can borrow from friends, family, banks, or anyone else that trusts you. Alternatively, you can seek out investors. One type of investor is the angel investor, someone who has independent wealth and is looking to invest it in startups. These investors typically provide the investment in return for a form of ownership in the business. In this way, if the startup is a success, the angel can reap some of the same rewards as the entrepreneur. In addition, if the angel invests wisely (or just gets lucky) the returns can be much greater than what other forms of investment might provide.

How does someone green to the startup business approach an angel investor? Networking, networking, networking is the best answer. Work your network of contacts until you can find someone who will put you in front of an investor who will listen to your idea. If all goes well, you get your funding and become a huge success. Are there any other ways? Many angel investors participate in workshops, conventions, and other events where many startups are able to pitch to a group of angels at one time. In some cases the angel investor(s) ask that a fee be paid. This fee could be anywhere from a few hundred dollars to possibly several thousand dollars as well as a ownership stake in the business. Is that an ethical practice? Jason Calacanis of Mahalo says no, and is calling out those angels who require entrepreneurs to pay to pitch their idea.

It is easy to side with Jason on this debate. From the entrepreneurs perspective, you have little money to start with, and a wealthy investor asking you to pay to present your idea seems like a kick in the teeth. Jason's position is taken from the basis that these wealthy investors can certainly afford the cost of a meeting room and a cup of coffee where the startup would struggle to provide those things. To an extent, I believe what Jason is saying is right. Angels that prey on the naiveté of new startups are as unsavory as those "modeling workshops" you may seen advertised throughout the year. On the other hand, I feel that there is a need to play the devil's advocate here.

One statement I take issue with is the supposition that an investor's time is both infinite and worthless. An investor's time is certainly not infinite. Investors are not stupid, and have typically attained their wealth by getting the most return on their time and effort. So is it so wrong for an investor to expect their time to be compensated for listening to a pitch? Jason even admits in his post that he is inundated with pitches, much like a lottery winner might have people come from every corner to ask for money. If I were in the investors shoes (and wouldn't that be great!) would I really be interested in opening the floodgates? Would it be worth my while to wade through thousands upon thousands of ideas to find the one I find interesting? Perhaps. On the other hand, I could assign some small fee to each pitch that says, "If you pay this fee, you go to the top of the stack and are guaranteed to get read." This could be taken a step farther, "If you pay for my time I commit to acting as a consultant for so many hours, advising you on your business and potentially making an investment." According to Mr. Calacanis, any form of payment for listening to a pitch is wrong. Not only is he calling out those that require payments, but he is seeking out those who might pitch to these investors and actively discouraging them from working with these folks. He is engaging in a tremendous smear campaign against anyone who charges startups to pitch their idea.

So is the Jason way the only way? Again, I have to say for the most part, I agree with him. The number of investors out there who ask a nominal fee and provide real value on that money are far outnumbered by those who are simply preying on the ignorance of others. Still, I do believe that there are those out there charging a small fee for their time who are legitimately providing value, so I can't agree 100%. I wish the Jason Nation the best of luck in exposing the most grievous offenders, and hopefully this leads to more great ideas getting the funding they deserve.

Have you ever paid to pitch? Did you get funded? If not, did you still feel as though your pitch money was well spent? Should those who charged and provided value be praised or vilified?

1 comments:

Steve said...

Well, first I would agree that everyone's time is worth something. Also, anyone can determine what they are going to charge or not charge for in terms of time, material, etc.

In theory, Angle Investors are supposed to want to help struggling firms or individuals who need capital and cannot get it through the traditional methods.

Therefore, it seems to make little sense to expect these people to have money to pay for advice. If you are going to expect to be paid up front, then you are acting as a consultant and not an investor.

In addition, Angle Investing in general I think is profitable for the investor because they are able to take a fairly large percentage of the business ownership and when it succeeds (if...) they are there to make a huge profit.

Granted, a lot of these ventures will likely fail but the whole point of an Angle Investor is that they can see the potential, are willing to fund the company and put in time in mentoring to help make the company a success.

If they do not want to do these things then perhaps they should invest their money in a more conventional manner.

 
Jade Mason