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.
Self-billed as ‘#1 European Internet event’, LeWeb, is charging the startups 1500 Euros to enter their startup competition and there is no explicit prize / promise of investment. This is no different that angels/VCs charging for their time... Surely by charging the startups they will be excluding the very ones that they should want to encourage- i.e. those that are good enough not to need to pay to pitch. For evidence of this, just look though the past winners- cant see any BIG names. This is really shortsighted because surely many of the attendees will be there to see the ‘20 best applicants’ and the eventual winner. This seems a great shame because otherwise the conference looks fab, the speakers list (below) is a veritable 'who's who' of the digital good and the great. I hope the organisers will right this wrong... and if they don't, perhaps the speakers and attendees will boycott or maybe Jason C will organise a competing event?
Speakers list:
Christopher J. Alden SixApart Ltd.
Eric Archambeau Wellington Partners
Michael Arrington TechCrunch
AJ Asver
Osama Bedier
Gina Bianchini Ning
Richard Binhammer Dell
Violet Blue
Lars Buttler Trion
Jeff Clavier SoftTech VC
Jennifer Corriero TakingITGlobal
Thomas Crampton
Jack Dorsey Twitter
Timothy Ferriss Author
Andrew Fisher Shazam
Laura Fitton
Steve Gillmor TechCrunchIT
Louis Gray
Baroness Susan Greenfield CBE
Nick Halstead TweetMeme
John Ham Ustream
Brent Hoberman Mydeco
Tony Hsieh Zappos.com
Chad Hurley YouTube, Inc.
Joi Ito Creative Commons
Justin Kan
Andrew Keen
Dan’l Lewin Microsoft
Marissa Mayer Google
Ben Metcalfe
Jack Moffitt
Dave Morin Facebook
Kimbal Musk
Ouriel Ohayon
Jeremiah Owyang
Sean Percival Tsavo Media
Chris Pirillo
Shervin Pishevar SGN
Steve Rubel Edelman Digital
Christopher Sacca
Robert Scoble
Yossi Vardi Investor & Entrepreneur
Martin Varsavsky FON
Gary Vaynerchuk
Posted by: Anon Anon | October 11, 2009 at 03:29 PM