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Why Entrepreneurs should not pay Investors to Pitch

January 7, 2010 by Bernard Leong  
Filed under Venture Capital & Private Equity

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Venture CapitalRecently, I read that Angels Den from Europe has landed in Singapore. In their proposal, they are charging startups S$1499 upfront to pitch, and takes a 5% success fee. It also prompted response from local blogger DK that entrepreneurs should not pay investors to pitch. My stance is that entrepreneurs and start-ups should not pay investors to pitch and here are my opinions on this issue.

Probably, as an investor and entrepreneur myself, I have never believed that you should pay consortiums or groups of angels and venture capitalists to pitch. It is totally contrary to the spirit on how the entrepreneurial ecosystem should work. Sometime back, Jason Calacanis, CEO of Mahalo and also host to “This Week in Startups” took on angel groups in US, for example, Keiretsu Forum, Angels Den and Tech Super Club. According to Jason Calacanis, get entrepreneurs to pay for pitching is ridiculous. As a result of taking on these groups, Jason Calacanis led the beginning of an Open Angel Forum to provide a new model for entrepreneurs to pitch for free against these groups.

It is not in my place to offer any opinions about Angels Den, but I will state my opinion why entrepreneurs should not pay investors to pitch.

  • Renowned Business Angels and Venture Capitalists who created big companies don’t do that: Ask the famous business angels like Joi Ito or famous venture capitalists from Sequoia Capital, Kleiner Perkins, Benchmark Capital and etc, you do not hear that they require the entrepreneurs to pitch. Instead, they are ready to buy the entrepreneur a meal or drink and spend the time to listen to the ideas of the entrepreneurs. These are the same angels and venture capitalists who produce Google, Facebook and Twitter. None of the top notched companies pay angels to pitch their ideas. Consider another argument, entrepreneurs are trying to set up companies with limited resources and financing, and yet these groups make them pay to find investment. In fact, a lot of entrepreneurs and developers enjoyed the free Neoteny Conference organized by Joi Ito last year. The people who attended (including myself) even learned more abut term sheets and valuation. Try to make a guess how much it cost to get Joi Ito to talk about start-ups and new venture financing: Absolutely Free! and I did not add the free lunches and coffee breaks too.
  • Even agencies Singapore Government make it free for entrepreneurs: If you have recently watched the iMatch conference, where MDA organized entrepreneurs in Singapore to pitch in front of an international consortium, you do not hear the Singapore government will tell you to pay for pitching. In fact, they enlisted the services of the incubators in iJAM and several business angels to help the companies to prepare their presentation for the investors. It’s probably one of the things I praised the government agencies like SPRING and MDA are doing with the iJAM and TECS schemes.
  • If you fail many times to get an investor, you will end up losing more money doing this: Here is a way to think about this. If you pitch your idea and the investor did not respond to you, it just means that he or she has no interest to invest in your company. Your job is to iterate from the reason to why the investor did not think that it’s a good proposition to invest in your idea. If you are serious about your start-up, you will put your own money to make it work than to spend the money to pay some middle men to get you investors who may or may not put money into your company.

I will leave the entrepreneurs to decide whether to engage with these groups. Ultimately, in the ecosystem, there must also be a natural selection to decide the weak and the strong. Perhaps, having these groups help to make that distinction.

Related posts:

  1. Entrepreneurs’ Basic Etiquette with Potential Investors
  2. Pitch To Joi Ito
  3. VCs, Angels, Entrepreneurs Summit with Joi Ito – 14 Sep
  4. The Difficulty of Developing Venture Capital in Singapore
  5. A Map On Venture Capital In Singapore

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Comments

  • Somehow Disqus has failed again or this guy did not register a Disqus account to post.

    From: Richard (at) Gmail.com:

    Dear Bernard.

    It is pretty clear that you have missed the point about angel investing. In order to see so many investors of that calibre it would cost you much more in taxis, train fares, lunches, coffee and anything else you have to spend on to get an audience with that many angels on your own time.

    And to be honest, what you have written (and the awful way you have written it) shows anyone you don't quite have the firm grasp of business you think you do.
  • Richard,

    From reading what you have written, you are just apply ad-hominem (aka personal attacks) arguments. The whole argument here is that the entrepreneurs should not pay so much such as US$1499 in order to pitch. The investor should be rich enough and take the time to meet the entrepreneur. I have bought coffee and tea as an investor to every entrepreneur I have met and paid for my taxi fares. It's a matter of principle that the other person is already poor in the first place to start with.

    Here is how I look at it. If an investor charges an entrepreneur to pay, it can mean two things. First, he's trying to leech off the entrepreneur who is already poor, and let the entrepreneur take all the risk and the liability. Second, the investor is not good enough. The best angels in the world do not charge. If your idea is good enough, you don't need to pay for pitching.
  • Richard
    Dear Bernard.

    It is pretty clear that you have missed the point about angel investing. In order to see so many investors of that calibre it would cost you much more in taxis, train fares, lunches, coffee and anything else you have to spend on to get an audience with that many angels on your own time.

    And to be honest, what you have written (and the awful way you have written it) shows anyone you don't quite have the firm grasp of business you think you do.
  • Angelsdenuk:

    I totally disagree your argument that the system of getting entrepreneurs to pay investors for pitching works. First of all, in all your arguments, consortiums of such nature have NO success story that is even close to Flickr, Gizmo5 or Admob and l shall offer the principle of charity that Google and Youtubes are examples that organizations of such nature can never aspire.

    The angel investment market may not be perfect. We can definitely make it better by offering aspiring entrepreneurs and anyone who is interested to set up a business more information. The key here is information. In any case, the angels community (BANSEA), and government agencies (MDA, IDA and SPRING) are offering the entrepreneurs to compete in a free market and decide who should pitch to the top guys. The difference is that it's free.

    At least if the entrepreneurs don't make it, they know that they do not have the competitive advantage and go back to the drawing board so that they can make it better. In fact, in some of these pitching sessions, the organizers also help the entrepreneurs and assisting them to fine-tune pitches and presentations for free. So, if I am the entrepreneur seeking funding, then I will choose this option. On the note of complexities of term sheet, I highly recommend that you should learn from Joichi Ito who did a Neoteny conference here and give the class for free too. So, I don't see how paying $1499 can give any value to any entrepreneur with these organizations offering free videos to hear and learn from the best of the trade.

    The three arguments that consortiums like yours offer (which I don't think really holds water):
    1. The argument that you need to prepare entrepreneurs - the education purpose: The best entrepreneurs and the best angels/VC events are doing it for free. Schools, government organizations and venture incubators do exactly that too. Charging the entrepreneurs to pay (given that they are already poor) provides no difference. If your model provides equally successful opportunities like companies who get the Benchmark, Sequoia or other VC money, then you have a chance. Otherwise, it is important that we provide information that good companies get everything for free and the best entrepreneurs get these education for free.

    2. The "revolutionise" market argument - In the business process system, you are just acting the role of the middle-man. However, there exist a way to bypass the middle man except that the every day man should know that the best entrepreneurs and companies get it free and not pay the middle man S$1499 for pitching.

    3. The filter argument: The key argument that your platform argues is that you want to use payment to filter the strong and the weak entrepreneurs and not waste your time. But the best ones are already getting it for free, because if their ideas and execution are good, then they will get the money without paying any middle man. So, from that argument, it means that the platform of getting entrepreneurs to pay for pitching is meant for 2nd or 3rd tier entrepreneurs who are not good or not connected. The plain truth is that this target market contains people who are just pursuing a bad idea. This argument from Jason Calacanis making the analogy with Hollywood is the best way to explain why these platforms of matchmaking and payment don't work:

    In other words, if this was Hollywood, the folks who pay to present to investors are ugly, unpopular and lack talent. I know, that’s harsh but I’m afraid it is true. If you’re idea is good it will spread–even if you have no track record. If you’re only option is to pay to get in front of these folks you’ve probably got an idea that is weak or bad.
  • BestBusinessAngels
    Paying to pitch seems distinctly out of step with the market these days.

    Peter
    www.bestbusinessangels.com
  • Ross_Stokes
    @Bernard - you are assuming the middle man doesn't add value. If the middle man has the expertise to help the entrepreneur advise/develop the business plan and pitch so it has the best chance to attract the right investor then I think the amount charged is reasonable. Also it is not exclusive so that same pitch and plan can be used to present over and over again... which is more often than not required to find the right fit. 5 hours consultancy to advise an entrepreneur on how to present their business plan would cost a $1500 + unless the entrepreneur is lucky enough to find a benevolent mentor or an angel investors who is willing to help as they see some value in it for themselves.

    Most of the success fee based Angels and VCs who broker deals want exclusivity... understandably too as they are carrying the risk of time, money and energy until a deal is made.
  • DK
    Ross: Sorry for being blunt here, but your model sounds like those "model agency" business model where they go hunt for potential model along the street. These middle man will convince the person that they have potential to be the next big model. But they will need to pay for modeling classes, portfolio photo shoot etc etc.

    I don’t know any successful startup that uses this “pay to pitch” model. I also don’t know any reputable angel investors who associate themselves with this “pay to pitch” model. I strongly believe that startups shouldn't be paying to pitch.

    If you could, please name us a few successful startup and angel investors under your wings. Perhaps that might change my opinion about Angel Den.
  • Ross_Stokes
    DK, I'm an entrepreneur not a broker. I'm not associated with Angels Den in anyway other than observing their development and interested to see if they can add value.

    This discussion is about whether the model is valid and works. Time will tell whether it works in Asia.

    I have nothing to defend here other than wanting to see as many options as possible available to entrepreneurs to help fund their businesses.
  • DK
    Oops, sorry. I thought you are from Angel Den.

    I also want to see as many options as possible available to entrepreneurs to help fund their businesses. But this is certainly not the option I wish to see. I've spoken to many startups here in Singapore and all of them agree that we shouldn't allow this model.
  • Ross_Stokes
    DK... no problem on the misunderstanding.

    However you seem adamant that this model doesn't add value to entrepreneurs. Have you taken the time to speak to the people at Angels Den and do some due diligence on the stats and also speak to people who have been through the process who have received deal offers and those who haven't.

    To me that is when you can make a considered opinion on a model and not judge it on your past experiences or loose cross industry similarities. Models... business that is... are constantly up for review and refinement.
  • Editor's Note: The reply has been submitted to SGE and it's approved immediately. For some reason, Disqus is not publishing the comment and we have been looking into resolving the issue. Perhaps, the angelsdenuk should register an account with Disqus. For the sake of reply, I will post this here and then reply in another comment.

    From: angelsdenuk
    lee@angelsden.co.uk

    Hi Bernard,



    Many thanks for giving us the opportunity to respond.

    Regarding your comment: "It is totally contrary to the spirit on how the entrepreneurial ecosystem should work." One should note that there is a huge difference between what "should work" and what "does work". It is important to detach yourself from a Utopian view of Angel Investment where every well-positioned Angel investor has a clear view of every start-up that is worth investing in. The Angel investment marketplace is an imperfect one - just like the dating one. Two individuals that are perfect for each other may never meet. Angels Den is a match maker with proven credentials that provides a route to funding for all types of entrepreneurs.

    It is our role to invest our time and money in organising Angel investors and providing a platform for them to find their perfect investment, then in tandem to providing assistance, guiding and coaching to support the entrepreneur to become ‘investment-ready’ - from establishing their goals, creating a water-tight business plan, becoming pitch-ready, through to the legal complexities of an Angel investment agreement.

    The figures you talk about are not purely for a three minute pitch, they cover the whole process from genesis to completion.

    Furthermore, do you think the business Angels you talk about would entertain, without introduction or pre-screening ANY entrepreneur regardless of how pitch or investment ready they are? I applaud your enthusiasm, but feel it is misplaced. Just as your view that Google, Facebook and Twitter didn't rely on an Angel investment network to find finding. These companies were in a very fortunate position due to their contacts - not every entrepreneur is fortunate to have those contacts and experience - that is where the Angels Den service comes into its own.

    Angels Den brought a radical new model of Angel investing to the market place, which is still only two and a half years old. We made it accessible to the person-in-the-street. We do not vet companies looking for funding and we have no minimum funding requirement. We provide a straight-forward, transparent, cost-effective and fast service connecting entrepreneurs with potential investors.

    A question recently has been "does Angels Den work?" Well we can categorically say YES! On a given SpeedFunding event on average 225 individual pitches are made, 90% of the entrepreneurs recieve interest from at least one angel and occassionally entrepreneurs will gain interest from ten in one evening. How long would it take for an entrepreneur to meet 15 Angel Investors? If time is of the essence, surely its wise to invest in shortening the time significantly to raise necessary funding?

    What is a constant in business is the fact that whenever a new organisation begins to revolutionise a market, turn it on its head, offers something different, something more; there are plenty of people willing to maintain the status quo. Angels Den offers every entrepreneur access to angel investment; surely that's a good thing?
  • Ross
    Bernard... I agree with your last point - "Ultimately, in the ecosystem, there must also be a natural selection to decide the weak and the strong."

    The value of Angels Den will ultimately be decided by whether they facilitate enough deals. Those who get deals will probably feel like its money well spent, those that don't get deals will probably feel like they have not gotten value.

    Time will tell whether this model will add value to the entrepreneur or just angels den's pocket.
  • @Ross Yes, that's right. That's why I am not slamming the organization or the people there, but on the philosophy and the premise that entrepreneurs should pay investors to pitch. If weak entrepreneurs want to go to them and lose some money, I am not going to offer any sympathy if they found no value. Of course, if they succeed (with those guys), my only words are "good for them but they can get it for free if they are really good".
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