There's been a bit of a backlash recently - spawned primarily by Jason Calacanis' post - against angel groups that charge entrepreneurs relatively significant sums to pitch their ideas. As Jason puts it, this is an “injustice” and an “abuse of power” – that the poor, desperate entrepreneurs shouldn't be footing the bill for any expenses for the rich angels they are seeking money from. In principle, I think we can all agree with this.
Much of the focus here has been on exposing the bad behavior of these investors, but I think the problem is deeper than that. In other words: By paying to pitch, entrepreneurs are actually hurting their already slim chances of raising money.
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Early-stage ventures have a high rate of failure.
We all know that high-tech ventures – especially in the nascent stages – have a very high rate of failure. David Rose shed some last , he expects seven out of every ten investments to bust, two to make their money back, and one to carry the rest of the portfolio. (I may have the specific numbers wrong, so feel free to correct me). Now keep in mind - this isn't one in ten companies that pitches him - this is one in ten that David actually chooses to invest in. One has to assume that David and his peers get pitched by an order of magnitude (or two) more companies than they actually invest in.
Paying for access to investors is likely a negative indicator of success.
There are a variety of motivations behind why a company might pay for access to investors, but for the most part none of them reflect positively on the company’s chance of success.
With the rise of social tools, investors (both VCs and individual angels) are increasingly more accessible than ever before. Entrepreneurs with a good team, product and/or idea should be able to get a meeting without paying for the right to pitch. Moreover, if an entrepreneur is not resourceful or confident enough to get a meeting with a potential investor, why do we think said entrepreneur will be any more resourceful in terms of actually building a successful business (which we already established is a difficult thing to do)?
In other cases, entrepreneurs were resourceful enough to get introductions, but the investors declined to hear their pitch. If this happens repeatedly, it should be a pretty strong signal that there is something fundamentally wrong with the business or how it is presented. Paying money to pitch isn’t going to fix those problems.
Another group of entrepreneurs who pay to pitch are those who are desperate, as mentioned in Exhibit B. First of all, if you're running out of money, spending more on it to pitch doesn't seem like the best route to me. And, just like in dating, if you're desperate for cash then investors are going to see that and are not going to be as attracted to you. Again, this is a situation where paying just to be in front of the investor isn’t going to solve underlying problems.
Sophisticated investors should not invest in any company that pays to pitch them.
If an investor expects even the majority of the small group of businesses that make the investment cut to fail, then he or she would be foolish to invest in a company that has demonstrated that they are more likely to fail than the average business. First of all, if they did chose to invest, they are effectively taking valuable resources away from the company which will hurt its chance of being successful and providing a return on said investment. Moreover, it should give the investor pause in terms of how the entrepreneur may spend the investor’s money going forward.
Understanding this dynamic, a sophisticated investor should not invest in any company that paid for that access.
I recently had an exchange with Joe Rubin from Funding Post about the Perfect Venture Conference they are running. The event will bring "20 early-stage technology companies" and "40+ VC and Angels" together for a full day of one-on-one pitches. The fee for this "exclusive opportunity" is $2,500 per company.
I know that everyone has a different definition of what "early stage" means, but I think we have to interpret this here as someone who has bootstrapped or raised a small amount of seed money and is looking to raise their first institutional round. After all, if you've already raised a significant angel round or other institutional round, you probably don't need to pay for access to investors (since access to follow-on money and introductions is a big part of the investor value proposition).
So, we’re pretty much dealing with companies who haven't raised anything significant yet and probably don't have much in the way of a product. Let’s assume that all of the investors listed actually attend the event (which some of the evidence Jason selected suggested otherwise for competing groups) – the fact that these investors paid to pitch should still raise big red flags in the minds of investors. I’m going to make a gross generalization here, but I think it’s safe to say that the companies pitching here are probably the best of the best.
When I passed this feedback along to Joe, he defended the price by saying that it was cheaper than their previous events which always sold out. What Joe fails to understand (or at least admit to me) is that this isn’t a compelling data point for the entrepreneur. In fact, the only thing that tells me is that there were at least 20 companies desperate and naive enough to pay to be able to pitch last year.
His pitch would be much more compelling if he could show that a greater percentage of companies that present at his conference get funded as compared to those who connect directly and pitch for free. Of course, I’m arguing that the opposite is true – that those who pay to pitch at these events are hurting their chances of being funded.
Advice to fellow entrepreneurs
Before you consider paying, reach out to investors! Personal introductions are always better, but I think you'll be pleasantly surprised to see how many investors are willing to meet with you even if you cold call. Quite simply, it’s just not as hard to get an investor to hear your pitch as these prices suggest. (Now, if these fees actually improved your chances of getting money, well, then, sure that would be worth it).
As I said above, if a number of investors decline to even hear your pitch, this suggests that there may be fundamental flaws in the business or how you're presenting the business. In either case, paying to get in front of the investor is not going to solve these issues - and both need to be solved before any investor is really going to think about writing you a check.
More importantly, there are a lot of great free events out there that will both help you connect with investors and get mentoring and feedback. If you’re in NYC, you should check out the Entrepreneurs Roundtable, organized by Centrl founder Murat Aktihanoglu. Murat brings in a different investor each month to meet with entrepreneurs, provide feedback on their pitches, answer questions (both general and specific) and so on. In fact, he’s in the process of connecting early-stage startups with mentors who will help them refine their pitches to be delivered in the January meeting. I can all but guarantee this will be much more useful than any of these “pa