2) I disagree on there being any legality issues – numerous law firms have confirmed this for the 100 or so angel networks that operate in a similiar way and have for over a decade. You are the first that seems to have a problem with the charging of a success fee.

3) You make some big claims without any knowledge of what you are talking about. All anglels are fully educated on what they are getting themselves into, and most are only investing a small part of their wealth as angel investors. They don’t invest in funds (well some do as well) because they want to make their own investment decisions. There are plenty of VC funds that will take £10k investments – so the wealth of the investor has nothing to do with it – you are simply wrong here. About the only thing I agree with you is that you should only invest if you can afford to loose your investment; I am just intrigued why you think any of our investors would not know this.

4) Best qualified that pay the fee. I have lost the odd company I have interviewed and wanted to put forward but for whatever reason did not pay the fee. As mentioned already, the fee has been lowered 1/3 since I came on board and I am aiming to lower it further – but in my experience it is not a disincentive to many entrepreneurs. Most of the best companies come from referalls of people who have experienced our network in one way or the other – and they understand the economics of it).

5) There are certainly ways our business model can be improved (again see my original post) but a fundamental change is not necessary. If you think the angel investment model is broken – then again as I said in the original post – come along and do better. But you have yet to give any suggestions on actually improving anything that we do. It’s pretty easy to tell any business “everything you do should be free” – but that is rarely any help.

1) your firm charges to package presentations to investors. That is a service fee at best – not an angel function. An angel would do that for free.

2) Your firm charges a success fee. That is a broker relationship, and at bests skirts legality, and at worst is acting as an unregistered broker.

3) Your firm, and many like it, entice investors for whom these investments are inappropriate, based on their experience, net worth, and portfolio asset allocation. Almost no investor should have more than 15% of his portfolio in alternative assets, which would include real estate, commodities, private equity and venture capital. Further, he should be diversified across these sectors.

I would posit that most of your angels invest with you because they do not have the wealth to invest in top tier private equity or venture capital firms, and certainly are not able to diversify among several PE/VC funds. These are precisely the people that should not be doing your deals.

As you suggest, an angel needn’t be a billionare but if they cannot afford to lose their investment they are an idiot, not an angel.

4) By charging, you create a conflict of interest. Are presenters the best qualified, or are they the most willing to pay you a fee? You should be presenting the best companies and ideas irrespective of their ability or willingness to pay you a fee, otherwise you are doing your investors a disservice.

Conclusion:
If your business model requires charging fees from entrepreneurs then your business model is broken. Like any entrepreneur, you need to examine it and adjust accordingly.

This insightful and forceful article sums it up well:

http://www.socaltech.com/Insights/showarticle.php?id=00068

I understand your need to defend your business, but it is wrongheaded. Evaluate and adapt as any entrepreneur should.

I am not going to go back into our business model – that has been done to death.

What I will take issue with is your description of Angel Investment. This is exactly the approach we are trying to educate people is completly wrong. Angel investment is a £1 billion / year investment class in the UK. It is not, as some people still seem to believe, a few rich people giving out money to young entrepreneurs because they think it’s all a bit of fun – have so much money they don’t care if they loose it – or have so little to do that working with some young people is fun.

The average angel is not a billionaire with a private jet and 16 houses. They often have full time jobs in other companies or their own company. The invest principally for the financial return but also will often only invest in companies they find interesting, they feel they can add value and sometimes because the company has some social purpose. The average age of the entrepreneur getting funding is not 20 as some people on techcrunch seem to believer, but closer to 40.

This is the reality of angel investment. The term itself came from investors into London theatre. Perhaps we need a new term for the investment class – it’s not entrepreneur charity but an asset class that should be taken seriously. Returns for the class are essential to bring more money into it – which is what trully benefits entrepreneurs.

Lets examine the word “angel.” An angel, in the traditional sense, is a wealthy person who has the capital, acumen, time and desire to help out the next generation of would be entrepreneurs. He/she gives his time and insights freely, his rolodex prudently, and his capital in modest doses. Return on his investment is of secondary concern, building karma is primary. An angel can afford to lose his angel investments, and a return really won’t move the needle.

Chris, your firm is not a network of angels, it is a business borne on the back of struggling entrepreneurs. No aspect of it is angel-like. Your angels are really wanna be VCs. If they need a return on your investment of time, they are not an angel. Period.

Your business model is a bastardization of the angel concept.

And are you really complaining about the flakey entrepreneur who holds up investors for a higher valuation, or never comes back to close a deal? Seriously? How many times are entrepreneurs left out in the cold after extensively negotiating with and educating investors. Dude, that is part of the game. An entrepreneur who goes elsewhere for his capital is prudent – he clearly found a better deal.

Chris, you are not alone in this gambit. But lets face it, your business is not angel-y in the least.

You should call your firm a for-profit business that charges for prepping entrepreneurs, makes introductions to moderately wealthy people (most of whom should not be making these types of investments), and takes a success fee if these folks invest. In the States, that would be a “broker dealer” and would require a registration with FINRA, the regulatory body.

But angel network? Hardly.

Absolutely correct. We have been offered the ability to pitch many times for a fee. When we ask for the network to supply detailed references on the angels that will attend… they always come up short.

Angel investors that are worth your time focus on the exit – Angel investors that are involved in fee-based schemes usually have motivations that do not include your best interests.

Was everyone there like that? No idea. But I certainly came away thinking very highly of the LBA/LSC.

Hard to know who you are with an anonymous comment – so unclear if you actually did present or not.

However, giving you the benefit of the doubt that you did, you seem to be confusing two very different things. London Business Angels is the angel network we run. London Seed Capital is a £5m, government funded angel co-investment fund. That fund would invest in 4 or 5 of the deals per year that were presented through London Business Angels. That the fund did not choose to invest in you suggests the fund manager (probably Jason Ball who now works for Qualcom Ventures) did not feel your business fit the fund’s criteria. The fund also relied a lot on angel co-investment; so if – for whatever reason – the company was not popular with angels the fund would not have been able to consider you anyway.

As for success fees; I mentioned them 4 times in my post – so either you didn’t read it or you read it a little too quickly.

I’ll add that the training process has been significantly updated since I joined – however the existing one was still very good and was in operation in 2007 our record year for investment. There is of couse, always scope for improvement.

My experience? Dreadful. LSC had no interest whatsoever in us and our success, it was all about receiving the presentation fee. As for the “training”? It took as long as Chris mentioned in his article however it was terrible. It was inadequate, insufficient and largely irrelevant. As for providing over a week of support reworking and editing exec summaries and powerpoint presentations, that wasn’t my experience – more like here are our comments now make changes and that was it.

As a side note, I didn’t read anything about success fees – these are paid on top of your fee to present. These organisations aren’t charities and these fees are an income stream for them. It’s a win-win situation for these angel networks – they get paid regardless.

Based on my experience, I would advise all start-ups to avoid paying to present.

Also would be good if we got some people coming forward with praise or complaints about some of these Angel groups. We might be tainting every Angel group with the same brush which would not be fair.

Don’t get me wrong, I don’t feel that LBA is in the same boat as hope merchants like Angels Den, there is definitely a slippery slope once you start asking people to pay to join+pay to pitch+pay upon success+pay to breathe etc, but ultimately we need to be in a situation where an angel wants/needs to come to a pitch.

I do strongly disagree that an entrepreneur not paying to pitch is the same as an angel not paying to join a network. As an angel, if I join an Angel Network and I have no real financial obligations, then there is no pressure to come to a pitch. As an entrepreneur, I have to get funding so I have to pitch, and more than likely your network is not going to be the only one I pitch to.

It’s not the case that it is a zero risk proposition. If we didn’t do deals, we would go bust. We don’t make nearly enough money for the fees charged companies and investors to cover our costs.

I agree the US model of charging investors more and entrepreneurs less/none is better – we have tried this and it did not work. Our aim is to move towards that, and I have explained how. As I have mentioned a few times – lots of networks charge investors nothing – however much better you are; it’s hard to compete charging anything when the alternatives are free.

In our opinion your last paragraph applies equally to entrepreneurs.

I’d also like to add that I will be the first person to shout Angels Den’s name from the roof tops, if they prove that they have done the deals that they claim to have done. It would be an amazing story – the biggest success story in European angel investing. I want it to be true. However, if there numbers aren’t true then that should be highlighted also.

Mike (Butcher) in a comment in this story

http://tinyurl.com/yhlfah7

about Angels Den, you made the following comment:

‘Anyway, to cut through all this, we’re offering Bill Morrow the opportunity to sit down in a face to face interview with me to get to the bottom of the Angels Den model and what it can offer startups.’

That was back in July. Did the interview ever happen? I can’t find it. Angels Den brought on Paul Walsh to target the web and digital sector, surely this would be a great opportunity for them to showcase their service and explain why digital entrepreneurs should use it. Mike, what happened?

In your case Chris, you charge a submission fee, a percentage of equity, plus a management fee. Personally speaking I have no issue with paying fees to access capital, but not all of the above. To be fair, not picking on Chris per-se, just the environment in this country in general. In the US Angel Groups generally charge the investor, and have stringent attendance requirements which means people are motivated to come out and hear your pitch in the first place. I still have fond memories of pitching my business at one such event at the LBS (thankfully, was free because I was the first to sign up). Afterwords I realized half the so-called “angels” were small restaurant/news agent owners, and the other half were there for the free drinks.

The unfortunate truth is, no matter where you are in life you don’t respect something that is free. If the angels don’t have to pay to be a member of a group, then they certainly have no concrete obligation to show up to pitch meetings and take part.

But I do understand your point, and I’ll see what we can do about calculating numbers based on those that have invested.

It is worth noting that people have different investment strategies – some invest £10k into maybe 10 deals a year. Others do £100k investments into maybe 1 or 2 and wait for the deal they particularly love. It makes “active investor” stats rather more complicated to generate than it would appear at first glance.

http://tinyurl.com/yhlfah7

about Angels Den, you made the following comment:

‘Anyway, to cut through all this, we’re offering Bill Morrow the opportunity to sit down in a face to face interview with me to get to the bottom of the Angels Den model and what it can offer startups.’

That was back in July. Did the interview ever happen? I can’t find it. Angels Den brought on Paul Walsh to target the web and digital sector, surely this would be a great opportunity for them to showcase their service and explain why digital entrepreneurs should use it. Mike, what happened?

It is interesting what you say about angels making their first investment through you, particularly the part that they often do so by following an experienced investor. Maybe there is a new model around that.

My concern remains though, that many so called angels, have very little intention of investing – that has certainly been the case historically. I think that all networks need to do more to filter the real from the fantasy investors, as access to angels is a big part of what you are selling and what entrepreneurs are buying.

In regard to transparency, I certainly don’t expect the angels to name themselves, but I do expect there to be some mechanism by which the networks have to prove the number of deals that they claim to have done, or not be allowed to claim that they have done them. Again, entrepreneurs are buying access to the potential to do a deal, so they should be given proof that the networks have done the deals that they claim to have done.

We get 1,000+ business plans a year at LBA. I interview about 150-200 of those and then put forward from that the best 42. We don’t go out there trying to find as many companies as possible to charge – but the best 42 in a year. I try and give as much advice and help to those that I meet that I decide not to proceed with – and regularly get emails thanking them that someone actually told them the truth.

Of course my opinion is an opinion – companies I have not put forward have been funded elsewhere – in the same way companies that have presented to our network but unfortunately not raised money have raised it elsewhere (and vice versa).

It’s worth noting that it is not easy raising money in the UK. I think there is sometimes a feeling on techcrunch that raising seed money is a simple thing to do. This is rarely the case.

And yes, there is always coffee for everyone I meet

This is an excellent point and goes a long way to answering #2. I think #3 still leaves a strong reason why we would want a company to cover at least some of the individual sunk costs we spend per company – but I agree on your argument. In my mind, the target would be approx £250 per company but with a clause – as you suggest – of paying the full £850 or £1250 should they let us down. That’s the sort of level I am aiming the network for.

Thanks for the comment.

Chris

I do understand where you are coming from – and of course lots of companies will get their funding from networking (although be careful not to break the law here!). I think the easiest way to answer your point – is that there is an opportunity cost to this. For a lot of our companies, £850 is not a considerable amount of money to both prepare them for investment and then put them in front of a group of real investors. Yes they could go to lots of events and try and meet people – but this might well cost them considerably more in time – if nothing else.

Also worth noting that companies continue to pay for these types of services; I’d be surprised if Google’s investment bank that took them to an IPO worked on commission only. Perhaps they did – but most won’t. If you compare the fees we charge and effort we put in and compare that with what a corporate advisor might charge on a £10m transaction and the work they put in – you might start to think we are pretty good value.

Thank you for the great questions on this. As I am sure you can understand, I can only comment on our own network. As for our numbers, our principle filter is that our investors pay to be members. As mentioned in the post, this is a pretty high filter – most networks don’t charge. We are also particularly careful about the intentions of people joining – we have had the odd “consultant” try to join who is looking for work – but we remove them instantly; there is no benefit to being a member of LBA and paying – unless you are actively looking to invest.

We do not however check to see if the investors have invested before; anything but in fact. A lot of the people that have joined the network made their first angel investment through us – and have gone on todo many more. Some of them have done deals in other places that went very badly and join us because they want to have the support we aim to provide investors – doing a bad investment is really no qualification for being an angel investor. We do however naturally talk to members, find out what they are interested in – it becomes clear very quickly what they are looking for.

Our deals are typically syndicated with somewhere between 5 and 10 investors. Generally these deals will be lead by an experienced investor and then the newer investors will invest alongside. We used to have an active fund called London Seed Capital which made it that much easier to help lead this process ourselves – we hope the EIS fund we are raising will replace this. I would actually say that what our network can always do with more of is lead angel investors – they are the ones that often determine if a deal will happen. Finding the money to go alongside a credible lead angel, it less difficult.

Your other questions both really concern transparency. This is something that is really lacking in the industry in the UK – and there are various reasons (mostly bad) behind that. On deals, we post public press releases on our sites for deals that our members have invested in. I would like to get to the point where we post profiles of our actual members and this is something I am working towards. We now have a (private) linkedin group as well as an internal networking tool – and the next step will be approaching investors about public profiles (most likely linked to the EIS fund we are launching). Most of our investors are private people – they have no interest in generating PR about themselves and the last thing they want is people finding them and directly sending business plans – so while I hope we can get some of the investors profiles on the site; it will take some time.

As per £1,000 – we did try this in the past; and it did not work. I have been at the network 18 months; and hope that we can increase the value to members where they are prepared to pay this (or more likely pre-committ an investment into the fund) – however with a lot of competiting angel networks funded by the public purse, this is not particularly easy. If we did this now – we would loose lots of investors and do less deals – so it would be counter productive.

If you truly believe you are an entrepreneur with a great idea/product you will walk the earth to raise funding to push it forward. I totally disagree with paying an organisation to get the funding. If you need the tuition to present your idea and to make your business plan, you are too early to meet investors.

I rank this type of business [paying for Angels] just one notch above Dragons Den, which IMHO is sordid.

BTW I am an entrepreneur, I have made two successful exits and invested [Angel] in some companies, but never in the fashion of a network that charged the entrepreneur or the investor.

If you have a great idea/product/company, get out there and network. Speak to the bloggers with an audience, be creative. Do not pay money. Business is about making money, not spending it to raise capital.

That’s my rant for the day, feel better now.