Jason just ranted about angel groups charging fees on his blog. Go take a look if you haven't read about this topic. He gets a hat-tip from me for taking a stand on this. At the same time, here in Europe I've run across "closing" or "consulting" fees from VC's. This, in my opinion, is just as bad and as an entrepreneur you'd be foolishly throwing away money. It seems like these fees are disappearing but I am sure they still turn up every now and again.
Why are these dumb? Well, first of all, as an LP I'd be pissed about my money being spent this way. What actually happens? Well, it's pretty simple. The VC invests an amount into a company. Let's say 10 million. Right after the investment, the company is required to pay said VC the above mentioned "closing" or "consulting" fee which used to be somewhere around 3%. So, what's happening here? Well, the VC is basically taking out money up front on a deal without having done anything and he's already collecting maintenance fees from his LP's to cover these costs. If you have a VC arguing to you that there is a reason for you to pay the costs of his due diligence or whatever with this fee, be wary. He's lining his pockets with this cash. Now don't mistake this with legal fees or other fees incurred during the due diligence. Most VC's will set an amount in the termsheet (or shareholders' agreement) which is required to be paid. This is for external, third party providers such as lawyers or accountants. Make sure you cap this amount, usually at about 25k. But if you pay the 3% or 300k in my example, you basically have 300k less to grow your business. It's actually even foolish of the VC in regards to his investment case as the company ends up with less money.
As I said, these fees have been disappearing for a while. The one large European VC who used to charge this has stopped investing in venture deals altogether. I could foresee though some scrupulous groups implementing these again down the road. I was just as surprised to see these angel groups charging fees but realized I had seen this in Europe. As Jason wrote in his post, if you can't find VC's (or angels), you either didn't do enough work to grow your network or your product/team just isn't that good. No matter the case though, don't get suckered into paying unnecessary fees. Solve the real problem of tweaking your team and/or product and investing the necessary leg work to get the right contacts.