Woes for the Angel Investors of Sherwood Forest

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By Michael Backes on October 30, 2009

In the US there is a potential war brewing between angel investment networks and entrepreneurs.

In one corner, you have Jason Calacanis, entrepreneur. In the other, a variety of angel investment networks. And in a Robin-Hood like manner, it’s stacking up the rich versus the poor. The whole issue is whether angel investors should be charging start-ups for the chance to pitch their companies. The investor groups defend themselves by pointing out the various overheads in managing the groups, while the other side says, “you have 30 days to stop being a jackass.”

Having been through the process of these groups during my own start-up days, and as well as sitting in my role now looking at startups, I can really feel the pain that start-ups have with this topic. Emotionally I have to side with Jason. It’s hard not to. But I will tell you my experience, and you can decide what it’s worth.

As I was raising funds, I looked at a variety of sources. I was working with a CTO who had raised tens of millions in funding, but we were agreed that I didn’t need the same volume of cash that a fiber optic gadget did. So the goal was to get a smaller amount, which is not always attractive to VC’s. I assessed both angel marketplaces and angel networks as part of the solution. I think the marketplaces are much more sophisticated than they were back then, and the cost to “meet” the investors was more like a membership fee, similar to me joining a chamber of commerce. It allowed exposure to some investors in other parts of the continent that I did not have the travel budget for. I didn’t get any funding through this, but like I said, it was not a painful fee, and fit within my fundraising budget.

The angel networks, however, were another story. I was DAMN picky about who I even talked to at these groups. Mainly because I needed a return on time/money invested in the process. If you lay out the offers on the table, you can get a feel for who is just leeching your start-up and who means business. I won’t name names, but I eventually chose to work with one group. However, the terms were much more appealing. AND I never paid for anything up front. The chapter had a screening committee, and if you had your act together, then you got the chance to go before 20 investors, give a 20-minute pitch followed by Q&A. The investors liked us so much, and knew we were new to the process, so they just kept the Q&A open for an extra half hour. They arranged us to work with their mentors, with the goal of shaping things up in order to come back to the screening committee (again free). Then the point where payment would need to be made would be at the point where a guaranteed minimum of 50 investors would be in the crowd.

We never did decide to go to the final presentation, but the network basically invested time and energy into basically performing some due diligence for them, as well as providing me with some insights for our fundraising. But the vast amount of information is now online, and you can spend the time networking to the people and resources that you need.

Would I have paid? Back then, probably. Today I would be more hesitant. The consultation plus the terms that a minimum number of investors would be there would have been worth what the fee was at the time. But this was only one network out of all that I looked at where the angels actually did the screening for free, and then really invested their own time into the process. Today the landscape is different. Things like Y-Combinator, Seedcamp, the Open Fund, as well as all the competitions out there are a better investment of time. The investors who are looking for opportunities in your space will be at those shows, and possibly also sponsoring local roundtables or startup camps nearby. I have met a lot of great angel investors at events. They have a passion for the subject, or expertise that you can leverage in the business.

If you are starting the next great company, then my advice is to weigh all your options to get your investor-publicity. Fundraising is not your favorite activity when you are building a killer product, but by promoting yourself in the right arenas, you will get the attention and investment that fits. Will this Robin Hood actually topple these groups? I doubt it, and I am sure that an army of lawyers will be chasing him and his merry men through the forest for the next few months. But the legend will live on and we will see if it takes the form of a truly new funding option for startups as promised.

Michael Backes eVenture Capital Partners
Michael is a former entrepreneur in Texas that now sits on the other side of the table with a VC firm in Hamburg that focuses on digital business. He has experienced the rollercoaster in both startups as well as large corporates, in both the technical and business sides, and just can't seem to get enough of it.