Saturday, February 27, 2010

Why "Pay-to-Pitch" makes no sense for anyone

Over the last few months, a firestorm has erupted over angel venture funding groups and "deal-finders" that charge startups to pitch to their investors. The battle has been led by Jason Calacanis, who's declared war on pay-to-pitch. The most recent pay-to-pitch scheme to come under the spotlight is from New York Angels, led by David Rose (not the one with the orchestra.) New York Angels charges $150 as an application fee for a chance to pitch to whichever members of his group decide to show up that night. That's a lot less than some other groups and finders who charge thousands of dollars, but it's still pay-to-pitch.

In defense of why his group charges an application fee, Rose said the following: "The reason we charge a fee is because we're between a rock and a hard place. The unfortunate but accurate fact is that 90% of all companies requesting funding are simply not fundable, by anyone, matter how earnest the entrepreneur might be. The larger VC funds get upwards of 10,000 plans each year, but that's ok for them because they either completely ignore over-the-transom submissions, or have them read by a paid associate." (Click here for a link to his complete response.)

The problem with this logic is that $150 isn't going to spell the difference between a fundable startup and one that's not, and New York Angels is taking money from all of them. Assuming that Rose and his team only actually present the plans that they think are fundable to investors, they're effectively collecting $1,500 for every startup that gets to pitch. On the other hand, if they're letting startups pitch that they know aren't fundable, they're misleading the startups and wasting their investors' time.

If I were an angel, I'd want to screen my own deals, rather than let someone else tell me what's good and what's not. I wouldn't put any more trust in Mr. Rose than into a stockbroker or investment banker who's trying to get me to make an investment.

I don't begrudge Mr. Rose or his logic; I just think that it's wrong. Pay-to-pitch doesn't open up any real funding opportunities for startups. Investors involved in pay-to-pitch schemes either a) could do better by screening their own deals, or b) are motivated by the money they make from pitching fees, which means that they're not serious investors.
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