Tuesday, October 20, 2009

Watch Out for the Red W(h)ine

I have been following the rallying cry of entrepreneurs with some amusement over the past couple of weeks in response to a blog post by Jason Calacanis, "Why Start-ups Shouldn't have to pay to pitch angel investors." In fact, I was cornered by a member of this camp at our recent Sand Hill Angels annual social event at the Wine Room in Palo Alto (great place, by the way). I was afraid if I didn't answer the question of whether Sand Hill charges entrepreneurs to pitch properly, I might be wearing a very nice pinot.

I've written about the practice of charging entrepreneurs in earlier blog posts and it is not something we would ever do at SHA. However, the individual above was adamant that we should have a PR campaign to let the entrepreneurial community know that we don't participate or support this practice. I laughed and said that our web site made this clear and we may have even put a brief posting to this effect on our twitter feed. I'm also a strong believer that your track record and reputation are your most valuable assets in the venture community. This is not something that can happen overnight by putting a press release on the wire.

However, this is a great question to ask at the front of the process. I have put together a list of questions to ask your angel investor group contact:
  • Do you charge any fees to present or during the due diligence process?
  • How many investments have you made this year? Last year? Average size?
  • How many of those investments are initial investments? Follow-on?
  • In how many of those were you a lead investor?
  • How many do you have a board seat?
  • What percentage of your members have made an investment in the past 12 months?
  • What percentage of your members are not active angel investors (i.e. service providers)?
  • Do you invest as a fund, single purpose entity or as individuals?
This is not a comprehensive list of questions, but certainly a good start? At Sand Hill, we are very active and often lead investor and Series A board representative. We made 12 investments last year (5 new and 7 follow-on) and are on the same pace in 2009.

For those who do charge, should you avoid them like the plague or burn at the stake? I wouldn't go that far, but certainly fair to determine what you are getting for your limited amount of cash. Here is a list of questions I'd ask:
  • How much is the fee?
  • When are we obligated to pay?
  • What do we get?
  • Are you a broker-dealer? (Note: Finders fees are illegal in California for non broker-dealers, not sure about other states)
  • Do you have any service provider members? Do you charge them a fee?
  • If you do charge, why are you you charging me for the privilege of being added to a telemarketing list? Shouldn't you be paying me?
  • How many companies have paid fees in the last year?
  • How many of these have received investment for your group?
I don't think it's time to hang all angel investors in effigy, but remember that due diligence goes two ways...