Home Startup Scam: Paying to Pitch Puts Power Players on the Warpath

Startup Scam: Paying to Pitch Puts Power Players on the Warpath

Over the weekend, the blogosphere has seen a small but profound eruption of wrath over angel investor groups that charge startups to pitch them.

Jason Calacanis’ blog post on the topic, wherein he went as far as calling out these groups by name and posting each group’s pricetag, inspired “me too” posts from Fred Wilson and Robert Scoble. All parties seem to be in agreement that the practice is despicable and should be stopped. But like every hustle that preys on the gullible or less talented, pay-to-play pitching models will be perpetuated until made illegal, and no amount of blog posts will shame these investors into changing their behavior. So, should these scams be made illegal?

The short answer is “maybe.” Even in the gray areas of this murky-at-best practice, there’s a distinction between a group charging entrepreneurs $25,000 to pitch and charging $500 for a questionable “boot camp” pre-pitch session.

For example, Maverick Angels charges $495 for a mandatory “day-long training focused on how to present to angel investors” before participating in a “Deal Line-Up.” They also charge a $1,000 fee to present at chapter meetings, allegedly to cover administrative costs.

But as slimy as this practice seems and as flimsy as the group’s justifications are, the amounts charged by Maverick Angels pale in comparison to what attendees are charged for the Private Equity Forums. Investors and other professionals are charged between $975 and $3,500 to attend these pitch sessions, and presenting entrepreneurs, according to Calacanis’ research, pay between $14,500 and $25,000, plus a percentage of any funds they end up raising.

How are these outrageous fees justified? Organizer Mike Segal writes on the website, “Our forum could be best described as a co-op for the 12 to 15 companies that present. We underwrite the events and the presenting companies share in the cost. They do so because our model ensures them an audience of nearly 100% qualified investors, for an expenditure which generally pencils-out to less than $100 for each capital source in attendance.” However, if Calacanis’ figures are correct, Segal’s math is creative at best and deceptive at worst, since investor guests seem to run between 60 and 110 in number for each event.

And while Segal claims that the fees are also charged because the events are unsponsored, Bootstrapper.com founder Richie Hecker said his website sponsored one of Segal’s events just this past March. Do we smell a rat?

Other groups called out in Calacanis’ post include Keiretsu Forum, Tech Supper Club, and Angels Den UK, all of which he claims charge startups fees ranging between $595 and $8,000 to pitch to angel investors.

Most of the excuses we’ve read for these fees are laughable. It’s a filtration device, or it gives entrepreneurs a better shot at getting funded, these groups explain on their websites. This strikes us as pure rubbish, but apparently, some startups are still being taken advantage of by these systems.

“Why would any self-respecting entrepreneur pay thousands of dollars to rich people just for the opportunity to pitch?” Calacanis asks in his post. “Well, the truth is that the more mature – or flat-out better – startups would never pay to present. The best ideas by the best entrepreneurs get socialized instantly.”

He goes on to speculate that bad ideas and unconnected entrepreneurs put a startup at risk for these types of scams.

Paying an upfront fee for a few minutes of presentation time with potential investors seems like a last-ditch option for startups that can’t get funding otherwise. And the language and methods used by those collecting the fees seem designed to deceive. In short, even if these scams are not illegal, they are certainly predatory, and startups should be made aware that these fees exist the first time they visit the groups’ websites.

We would love to hear from any readers who’ve had dealings with these groups or from representatives of the groups, themselves, either in the comments section or via email.

And to all our other readers, what do you make of these schemes? Should they be illegal? Should there be strict policies requiring more disclosure or capping fees at a more reasonable amount? Or should we adopt a laissez-faire attitude and accept that, in fact, a fool and his money are soon parted, whether anyone likes that fact or not? Let us know what you think in the comments.

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