Startup Scam: Paying to Pitch Puts Power Players on the Warpath
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Over the weekend, the blogosphere has seen a small but profound eruption of wrath over angel investor groups that charge startups to pitch them.
Jason Calacanis' blog post on the topic, wherein he went as far as calling out these groups by name and posting each group's pricetag, inspired "me too" posts from Fred Wilson and Robert Scoble. All parties seem to be in agreement that the practice is despicable and should be stopped. But like every hustle that preys on the gullible or less talented, pay-to-play pitching models will be perpetuated until made illegal, and no amount of blog posts will shame these investors into changing their behavior. So, should these scams be made illegal?
The short answer is "maybe." Even in the gray areas of this murky-at-best practice, there's a distinction between a group charging entrepreneurs $25,000 to pitch and charging $500 for a questionable "boot camp" pre-pitch session.
For example, Maverick Angels charges $495 for a mandatory "day-long training focused on how to present to angel investors" before participating in a "Deal Line-Up." They also charge a $1,000 fee to present at chapter meetings, allegedly to cover administrative costs.
But as slimy as this practice seems and as flimsy as the group's justifications are, the amounts charged by Maverick Angels pale in comparison to what attendees are charged for the Private Equity Forums. Investors and other professionals are charged between $975 and $3,500 to attend these pitch sessions, and presenting entrepreneurs, according to Calacanis' research, pay between $14,500 and $25,000, plus a percentage of any funds they end up raising.
How are these outrageous fees justified? Organizer Mike Segal writes on the website, "Our forum could be best described as a co-op for the 12 to 15 companies that present. We underwrite the events and the presenting companies share in the cost. They do so because our model ensures them an audience of nearly 100% qualified investors, for an expenditure which generally pencils-out to less than $100 for each capital source in attendance." However, if Calacanis' figures are correct, Segal's math is creative at best and deceptive at worst, since investor guests seem to run between 60 and 110 in number for each event.
And while Segal claims that the fees are also charged because the events are unsponsored, Bootstrapper.com founder Richie Hecker said his website sponsored one of Segal's events just this past March. Do we smell a rat?
Other groups called out in Calacanis' post include Keiretsu Forum, Tech Supper Club, and Angels Den UK, all of which he claims charge startups fees ranging between $595 and $8,000 to pitch to angel investors.
Most of the excuses we've read for these fees are laughable. It's a filtration device, or it gives entrepreneurs a better shot at getting funded, these groups explain on their websites. This strikes us as pure rubbish, but apparently, some startups are still being taken advantage of by these systems.
"Why would any self-respecting entrepreneur pay thousands of dollars to rich people just for the opportunity to pitch?" Calacanis asks in his post. "Well, the truth is that the more mature - or flat-out better - startups would never pay to present. The best ideas by the best entrepreneurs get socialized instantly."
He goes on to speculate that bad ideas and unconnected entrepreneurs put a startup at risk for these types of scams.
Paying an upfront fee for a few minutes of presentation time with potential investors seems like a last-ditch option for startups that can't get funding otherwise. And the language and methods used by those collecting the fees seem designed to deceive. In short, even if these scams are not illegal, they are certainly predatory, and startups should be made aware that these fees exist the first time they visit the groups' websites.
We would love to hear from any readers who've had dealings with these groups or from representatives of the groups, themselves, either in the comments section or via email.
And to all our other readers, what do you make of these schemes? Should they be illegal? Should there be strict policies requiring more disclosure or capping fees at a more reasonable amount? Or should we adopt a laissez-faire attitude and accept that, in fact, a fool and his money are soon parted, whether anyone likes that fact or not? Let us know what you think in the comments.
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I'm a big fan of filtration. Not sure this is a bad thing, necessarily. Money talks, etc etc.
This is borderline predatory, and the cost is outrageous. I agree with the point that the best enterprises will naturally socialize, but certainly some great ideas need assistance and paying for that [likely remote] chance seems normal in our society. I vote capping it and not making these schemes illegal. Most importantly, we need to EDUCATE EDUCATE EDUCATE entrepreneurs on this topic - spread the word!
The real indicator is how many of them get funded after pitching.
Pitching costs you money one way or another.
You can dish out a round sum for meeting those moneybags and getting their attention.
Your average unconnected entrepreneur with an average idea can always save by going to crappy functions pretending to be a socialite for the same end result - 5 mins of a moneybag's attention.
I tried the latter. For a few weeks. Had enough. I'd better spend the time and energy cutting the code and building the business than listening to a bunch of self-obsessed attention seekers. Definitely don't want to be one of them.
I operated a number of pitch events in a down economy, like in 2001, where we had very few sponsors in Seattle.
Fund raising is not free as someone has to pay for organization, venue rental, drinks, food. etc. so angels will show up. We charged small fees for companies to basically underwrite the cost for a nice venue and food for the guests.
Getting Angels out of the house to look at deal flow during a downturn is a lot of work. When there are not many sponsors like now and back in 2001, pitch events that are quality need some mechanism for funding the operation and management of event. We basically made peanuts for our time and stuck it out during the last downturn to at least keep the light on in Seattle.
The bottom line, from my experience, rich people are often the biggest tight wads on the planet and never like to pay for anything ever. We were fortunate to have good mix of folks.
With that said, I have seen dozens of players out there that add little value, troop in arrogant investors who "rarely write a check" and then charge a ton of cash for the chance to pitch.
Thus, Jason Calcanis, if you suggest to shut down all paid pitch events, then think about the small fees that make quality events. Sure, rip the hearts out of the over priced players that rip off entrepreneurs. Just understand the real dynamics of what is really going on out in the market.
Regards, Tim
As a nonprofit w/no vested interest I have to say it leaves a bad taste w/me...Reminds me of my ad agency days when the award shows became 'pay to play' free for alls which ultimately became a yawn & a snorefest of 'same ol' same ol' winners ignoring the mega-talent of some raw indie finds who couldn't (or wouldn't) pony up to the trough. Just sayin'...innovation should be rewarded, payola tilts the playing field.
The Romans said it two thousand years ago, so it's not new advice: "caveat emptor." Long ago at one of the first startups I worked at, we got a call from the "World Business Review" (http://www.wbrtv.com/) with an offer to air a conversation with our CEO on nationwide television, plus misc. in-flight business channels. (Coincidentally, these calls typically follow the announcement of a round of angel or VC funding.) Of course, we "only" had to pay for several tens of thousands of dollars of "production costs." Fortunately, there's a simple rule for any entrepreneur that's approached with this kind of "offer": Just Say No. If an "investor" can't invest in some up-front diligence, that's not someone you want to partner with over the long term.
I am feeling better!
Let me see if I get this straight: It's insidious for an Angel or VC to charge a poor bootstrapped entrepreneur to come to the office and pitch for funding, right? Just like it would be wrong for a nonprofit charitable organization to charge someone to pitch for funding.
But wait! Instead, organize an "event", invite lots of other investors - your friends, you know the same faces that are at all the other events - have food and entertainment - THEN it will be OK to charge entrepreneurs to pitch! Who could argue? There are expenses associated with running the event, food, staff to be paid and advertising. Even better - require the entrepreneurs to pay for special training so they are "qualified" to pitch. And for good measure, don't be available for entrepreneurs during regular business hours in the weeks before and after - claiming "I am just swamped with the XYZ funding event".
The only thing that surprises me is that Jason Calacanis just discovered this. Grassroots entrepreneurs (particularly those not near NY or Silicon Valley) have been subjected to these practices for 25 years.
This sounds just like Hollywood, where "pay to pitch" has been a cottage industry for years now. For the outsider, it seems like a great way to get your idea in front of people you wouldn't otherwise have access to. However, if you're lucky enough to actually get into the game (Hollywood or Silicon Valley), you discover that deals simply aren't made this way. Worse, paying to pitch may actually tar you with the "amateur" brush, even if your idea is a good one. It's hard to ignore the undercurrent of desperation that vibrates under the surface at events like these.
I find it interesting that the boosters of one of the most free-market activities of capitalism - Start-ups - are calling for regulation of a trivial part of the game.
If I remember correctly, according to the ancient mythology entrepreneurs are society's smartest, brightest, most energetic and contributing members. Did I mention smartest?
So, it seems our Smartest members need to be protected from an obvious and transparent transaction.
It seems Our Future Business Leaders are not capable of making a simple decision - is it worth it?
I thought they were supposed to be processing this decision 50 times per day?
Microsoft vs linux vs iphone vs android vs clouds: is it worth it?
VC round now vs gutting it out: is it worth it?
Superbowl ad vs Facebook page vs AdSense campaign: is it worth it?
Pay money to pitch to a room that may or may not have interested investors in it?: STOP! THIS DECISION IS TOO TOUGH FOR YOU. WE ARE PUTTING LAWS IN PLACE TO PROTECT YOU. AGAIN, THIS DECISION IS TOO COMPLICATED FOR YOU TO MAKE, GO BACK TO YOUR CUBICLE.
Yeah, that sounds right.
I understand these events need to cover expenses such as venue, marketing, perhaps food, drink, etc. No doubt there are many scams out there. That said, I've paid $75 to talk to 80 people in person; not a bad investment. Caveat Emptor.
You are missing something here. It is not the angels that are charging for these meetings. These Angel Groups are professional companies that spend many hours developing the angel network, insuring they are accredited investors, and conducting the meeting. At the same time they conduct the due diligence on the companies, help them develop their pitch, and provide all the agreements. With the larger groups like Keiretsu Forum, they have more than 60 professional on staff.
When an entrepreneur wants to go to a forum they must pass a rigorous 6 week screening process. Less than 30% make it through and the ones that don't pay nothing. Of the ones that do, they will get to pitch to 200-300 accredited angel investors. More than 60% of the companies that present are funded. Compare that to the number that present to VCs and get funded.
Keiretsu Forum will also work with companies where the entrepreneur is not a "Valley Star" or where there are holes in the business model that would just make a VC say "Never mind were not interested". Keirestu Forum will provide a detailed review of why the company was not accepted and allow them to re-apply once they have responded to the issue. There are even programs to assist the entrepreneur to correct the problem.
Success speaks for itself. In the past few years, more than $200M has been invested in about 200 companies. There was $35M this year alone. This is a very valuable service and a key part of the startup eccosystem.
Seems our comment got erased.
As DemoPIT on TC50 is not free - the Calacanis should not offend people who ask for money for a pitch.
Jason doing a useful service here.
Mike Segal has been around for a while; in 2006 he operated M J SEGAL ASSOCIATES. His fees at that time were
The standard fees for being showcased at the event range from $14,500 to $9,500 based upon the Finders Fee percentages, if any, which would be payable to our firm on any investments in your company arising from conference registrants; or from any outreach to investors that we would undertake at your request.....
The Presenter Fee and Commission Schedule options are as follows:
Presenter Fee Finders Fee Percentage (Based upon a straight equity investment) $14,500 No Finders Fees
$12,500 3% Flat Finders Fee
$9,500 10% to 5% Sliding Scale - Reducing 1% per Million Invested
There is an entire industry that's emerged around helping startups succeed. These are businesses, individuals and organizations that make their living off the aspirations of entrepreneurs. I'm not saying that's a bad thing. Most startups fail... and the learning experience for founders is still incredibly valuable. Paying for access to help and connections is often the easiest way. I think the problem that we are seeing is this new support infrastructure isn't translating into better, faster, leaner or stronger companies. The reason to avoid paying for access is that the people who you are paying to get help from are often very invested in the current system for qualifying, cultivating and stewarding new businesses. Let me tell you folks... that system is thoroughly broken. You may very well be paying the very people who are responsible for breaking it.
Posted by: neteffect.wordpress.com
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October 12, 2009 9:40 AM
This is just the old DEMO vs TC50 argument again. I've known lots of companies for whom $20k at DEMO is an expense worth paying. The production value, the networking and profit for the organizers (it is a business) are what comes of it. If you don't like it and think you don't need it - then don't do it. But to moralize about how it's wrong and exploitive is obnoxious imho. Especially if you live out of the area going to San Hill Road over and over again costs money too. You've got to spend money to make money anyway.
paid to speak to potential investors? i think this is a very clever way for the organizers to squeeze every penny out of an event! wrong in my book!
If a startup is short on cash and pays for one of these forums then he is telling the venture capitalists that he isn't qualified to receive their money. If he isn't short on cash then what is he doing there in the first place.
This is especially true of a dotcom. You can do a lot with a couple or three thousand dollars and to gamble it on one of these forums is generally stupid. If you have a friend in the banking business they can generally connect you with some angel investors. Do mess with the vultures.
That was supposed to be Don't mess with the vultures.
So wrong, I agree with this being a bad habit and Jason Calacanis' rant, an utterly inappropriate, bad and disrespectful practice it is.
You need to think about the costs on both sides. There are costs to the entrepreneur in both time and travel to make 20 trips and 20 presentations to meet with 40 Angels even if he were to get 2 angels per meeting.
If you can make one pitch to 100+ angels/investors for $4,000 or $5,000 you are probably money and time ahead compared to the first scenario. Also, what is in it for the event organizers. They have to rent a facility and underwrite the costs. They also have the right to make a buck.
If you have no money and a lot of time, go the first route. However, the real dificulty will be getting the 40 angels to even look at your plan. Angel investors have more plans to review than they have time to spend. I believe spending the money is the most efficient way.
Should it be illegal, you ask?
Well, I don't see much difference between this and advance fee fraud (also known as "nigerian 419 scams"). You pay an amount of money under the illusion that it will result in receiving more money back.
If one is illegal, I don't see why the other isn't, too. No one in their right mind will pay $5k to pitch unless they've been convinced that they'll get a much larger sum in return, as funding. These operations should be required to disclose their funding rates. If (as is likely) a large proportion of the companies pitching go home with nothing but a hole in their expenses, then it is clearly and obviously a scam, preying on the gullibility of desperate entrepreneurs.
I can't imagine that anyone would disagree that something that can be called "a scam that preys on desperate people" should be illegal.
Daniel
A lesson from the dot-com era is there is unlimited demand for free a service. Charging a small, token fee to pitch is not unreasonable. I am a member of several entrepreneurial, VC, and business groups that bring in start-ups to pitch. Both the presenters and audience are charged token fees. It’s not unusual to attend a pitch meeting and have several of the start-up not show up. Likewise, I’ve seen both large and small audiences.
There is never a good reason behind charging a large fee for any service where the successful results are unlikely or uncertain. The start-up or entrepreneur is the least likely to have the money to pay. According to the corporate history, Cisco Systems had to pitch to 77 VCs before they landed their first funding and it took Colonel Sanders of KFC more than a thousand pitches. Do the math, how much would it cost for them to have done pay-to-play pitches? This is just another case of buyer beware.