I’m itching to start digging into the fun stuff, and the topic of the hour is whether companies should EVER pay to pitch their deals to investors. I’ll forego the opportunity to win the TechCrunch “Defender of the Free World of Entrepreneurship” award and say the answer is yes. Sometimes.
In my first post, I stated two of my core principles in the angel space were caveat emptor and TANSTAAFL: “let the buyer beware”, and “there ain’t no such thing as a free lunch”. Maybe it’s because I’ve been in businesses at many different stages, and maybe because I expect some basic decision-making capability from entrepreneurs, but it seems to me companies can usually sort out the cost/benefit for themselves. There’s also a natural selection process going on: whether an angel group charges fees – and how much – determines a lot about the types of companies that choose to pitch, and in turn about the types of investments that the group tends toward. A few illustrations:
If you’re a bootstrapped startup with two young, first-time founders living and working together in a garage, and think you’re ready to raise some capital for your new online Twaddle service idea, should you pay several thousand dollars to pitch to a big angel network? Probably not: there are undoubtedly other ways you could put the money to better use (e.g., buy more Ramen noodles), and you’re better off at that stage with just one or two investors who can help groom and connect you.
Should you pay a hundred bucks to pitch at an investor event put on by the local entrepreneur networking group, that includes business coaching and presentation advice? It’s probably worth it – you can use the help – the first time or two. After that you’re likely getting seesawed on the coaching, and you can let someone else help pay for the event. If you want to attend and think it might have value, by all means pay your dues and go and network like crazy. Maybe you’ll meet that one investor you need, or someone that knows him/her. How about paying for a booth or a demo station? Here I’d give the same advice I give to companies marketing at trade shows: if you aren’t a known player and aren’t speaking, your odds of getting the right traffic can be pretty horrible, so watch your expenses.
How about if you’re a little further along: mature founder team; product in beta; got some revenue coming in, but burning through founder capital fast and need to get an infusion. Here I’d expect the founders to troll their personal networks first, but if that isn’t successful it probably makes sense to try a number of sources quickly, and some of those will cost you. Just manage expenses to your expectations.
Finally, what if you’re squarely in the “gap”: solid revenues and nearing breakeven; good growth, but for a variety of reasons not interesting to the venture community at this point. You need to raise $1.5M for a major expansion, and know that your boutique investment banker friend will take on the project, but it will end up costing $50K after retainer and success fees. In this case, paying $5K to pitch to a large network makes sense – if the probability of getting funded is 10% or higher. But be prepared – you don’t want to waste this chance.
These are the decisions I’ve made myself as an entrepreneur, or helped other entrepreneurs through over the past five years as an investor and angel group manager. Most of the time entrepreneurs “get it”, and decide the right path for their situation. If they don’t take advice and/or make bad financial decisions… well, not everyone is cut out to be an entrepreneur.
All of the above is based on one premise: that the entrepreneur has good information about the potential outcomes at every stage in order to make good decisions. If a group or event manager can’t tell you what types of company are getting funded, how often and for how much, you should walk. And don’t go by long term averages (mean, median…): find out what has been happening in the past six months. Angel investor velocity changes over time, and in a down economy, velocity can trend to zero.
For angel group managers, there are two additional things I will add: give startups a break, and provide good feedback. Even though I ran a group that operated on a pay-to-present model, if we had exciting startups come through that were operating on a shoestring (think Twaddle in the garage), they got “scholarships” and a free ride. It’s just the right thing to do for them at that stage. Similarly, I always made sure applicants and presenters got good feedback: brief written comments with an offer to review in person in detail (no need to spend lots of time crafting pearls to cast… well, you get the idea). This practice was born out a personal bad experience: paying $500 to apply to an angel group that should have been a good fit for our offering, only to get a rejection with no reason. After harassing them, I got a mindless response of “come back when you have more traction”. Thanks for playing.