Jason Calacanis has declared war on organizations that charge entrepreneurs to pitch investors on their startups. With "boiling blood", he used a post on his blog this weekend to shame these organizations and to threaten them with extinction.
Singled out: a number of groups, including the well-known Keiretsu Forum. All of which charge entrepreneurs fees to present their businesses to "rich angel investors" who Calacanis believes are exploiting "poor" entrepreneurs.
Not surprisingly, Calacanis has received plenty of support. Robert Scoble wrote "It is ridiculous startups have to pay to pitch". Venture capitalist Fred Wilson thinks "it is great that Jason is outing" these "scams and scam artists". And ReadWriteWeb's Jolie O'Dell even hinted that the pay-to-pitch events these organizations run should be made illegal.
While I generally don't like pay-to-pitch, I have a different perspective.
First, I take issue with Calacanis' statement that "the rich people (angels) are charging the poor people (startup entrepreneurs desperate for cash to fuel their dreams) to hear their pitch". Let's be honest here: anyone who has the luxury of building a startup and making the rounds seeking investment probably isn't worrying about putting food on the dinner table at night. Some entrepreneurs may be working out of apartments, living on a diet of cheap pizza and beer, but it's a bit disingenuous to use the words "poor people" next to the words "startup entrepreneurs".
Second, while I'm sure there are shady pay-to-pitch purveyors out there, having had a close friend in the States who was a consultant to a startup that considered presenting at the Keiretsu Forum several years ago, there are a few things Calacanis misses:
- The Keiretsu Forum is a legitimate organization whose members, all accredited investors, have invested well over $100m in startups. Many of the companies funded are listed publicly.
- The "rich" angel investor members of the Keiretsu Forum chapters aren't charging fees. The Keiretsu Forum itself charges a presentation fee and as far as I know, the investor members aren't receiving any profit or compensation from it.
- Companies are only required to pay a presentation fee if they are offered the opportunity to present at a meeting of the full forum in their area. Before such an offer is made, they must pass a deal screening presentation.
- All investments are made directly between presenting companies and interested investors. The Keiretsu Forum isn't involved in the transaction and doesn't charge any success fees. Which is worth noting because there are hired guns who do fundraising for startups -- almost all of whom take a success fee that is based on the amount raised. While pay-for-performance is nice in theory, that can easily turn out to be more expensive than a reasonable up-front retainer, which, of course, most of accomplished hired guns ask for too for obvious reasons.
- According to the Keiretsu Forum, presenting companies "usually have accomplished a $500K to $1.5MM friends and family round before they reach us". So, in the Keiretsu Forum's case at least, it's hard to make the argument that cash-starved entrepreneurs are being exploited.
All of this said, the company my friend was working chose not to present at the Keiretsu Forum. Its management decided that the Forum's fees were hard to justify, and I don't disagree. Personally, I've never been impressed with what I've heard of the Keiretsu Forum and organizations like it. That doesn't mean, however, that startups can't evaluate their positions and come to a different conclusion -- that their fees are justified.
But all of this is missing the point. Let's talk about bigger issues. Like the fact that an entire cottage industry has been built up around technology startups and most of the money in it comes from hopeful entrepreneurs and startups.
Calacanis, for instance, is a partner in the TechCrunch50 conference. Startups selected to pitch to the conference's expert panels don't pay to get on stage, but Calacanis and company aren't footing the bill for travel and accommodations, either. Companies that aren't selected to pitch can choose to participate in the DemoPit and two of them earn the chance to pitch. But the DemoPit requires a conference pass. TechCrunch50 discounts the pass but it isn't free. Approximately 100 companies participated in the DemoPit this year. Now are all the tech conferences like TechCrunch50 that entrepreneurs are told offer the best 'networking opportunities' exploitative? I personally don't think so, but one could easily take the facts from this paragraph to make the argument.
For anyone really into defending the entrepreneur against injustice, why not call out angels and VCs themselves? After all, some of them expect the startups they're investing in to foot all or part of the investment closing costs. And let's not talk about the legal firepower a young entrepreneur reasonably needs to understand the implications of the term sheets that most professional investors employ.
The bottom line is that, not surprisingly, any entrepreneur who needs to raise money from professional investors is at a disadvantage. A debate over what you can charge entrepreneurs for as part of the fundraising process is a red herring. What nobody's talking about: the fact that the cost of pitching always goes beyond dollars and cents. No matter who and how you're pitching, the time and effort pitching takes has a very real cost for entrepreneurs and it's usually underestimated in importance.
But even recognizing this, the real scam is not that entrepreneurs spend lots of time, effort and money pitching investors. The real scam is the idea that it's sensible to start a business you can't fully finance yourself. I personally think the 'glamor' that has been built up around angel and VC funding is far more harmful to entrepreneurs than outfits which charge entrepreneurs to pitch investors. Pay-to-pitch is simply an inevitable response to entrepreneurs who have been seduced into believing that they can't go it alone; that they need to raise money to be successful.
While it is true that some new businesses do require the type of financing that only professional angels and VCs are likely to provide, the reality is that relatively few new businesses are financed by them. The majority of entrepreneurs who are lucky enough to get meetings with angels and VCs won't raise a dime. Which raises the key question: should the average entrepreneur be starting a business that he can't finance himself, or through more traditional means (friends and family, lines of credit, etc.)?
There are plenty of reasons to answer 'no!' to this question. One of the biggest: the risk involved. If you need to get from Point A to Point D and only have enough gas to get to Point B, leaving before you know that you'll be able to refuel the tank at Point B creates for a very risky journey. While entrepreneurs aren't generally risk averse, there's smart risk and dumb risk.
I'd argue starting a business for which your only hope of financing is by making the rounds door-to-door vacuum salesman style falls into the category of 'dumb risk'. The problem with starting a new business before you are reasonably confident you can obtain the necessary financing is two-fold:
- At some point, trying to raise money is likely to take up most of your time and effort. That means that you'll be spending less time building your business, which is what you ought to be doing. In other words, pitching investors can easily become a harmful distraction.
- The opportunity cost may be too great. An entrepreneur's most valuable assets are his knowledge, skill and time. By choosing to invest those things in a venture that he knows will fail if it doesn't get financed, he could be incurring a significant opportunity cost. Smart entrepreneurs look beyond the strength and appeal of their ideas and make wise decisions that take into consideration execution risk, such as the possibility that institutional funding won't come through.
In short, pitching almost always comes at a steep price for the average entrepreneur. Experienced entrepreneurs with a track record of success and rarefied relationships (like Calacanis) can often raise millions of dollars for just about anything they put their names on, making it easy to forget why other entrepreneurs are willing to pay to pitch, especially in today's oversaturated and competitive startup market. Which is why, for the rest of us, the words of Henry David Thoreau are worth considering:
The man who goes alone can start today; but he who travels with another must wait till that other is ready.
If Calacanis and others really want to do entrepreneurs a favor, they should stop contributing to the myth that startup success begins with a round of investment from top-tier angels or VCs and they should start selling the truth that self-sufficiency is a more more desirable and realistic foundation when starting a new tech company.