« $5k to pitch your business? Who falls for this?? | Our StockTwits Investment »

Revolutionary Angels – Round II

Online technology magazine Xconomy wrote an article yesterday that focused on the controversy surrounding Boston based Revolutionary Angels – the angel group that is sponsoring a business plan competition in which companies are charged a $4,995 “entry fee” and vie for a $250k investment from the group. I wrote extensively last week about my distaste for the “pay to pitch” practice in general and Revolutionary Angels’ spin on that practice in particular. The Xconomy article picked up that post and used it to effectively represent one side of the story.  They also talked to Chris Hurley, the CEO of Revolutionary Angles, who defended the group and their practices. Clearly this question has struck a chord with VCs, angels and entrepreneurs (it’s worth checking out the comments to my blog, the Xconomy story as well as the original NY Times blog that kicked off this round of discussion) and I thought it was worth addressing Hurley’s views with another post here.

Hurley had a few key responses – let me break them down.

Companies actually get consulting help for their entry fee. Xconomy reports Hurley saying that “Revolutionary Angels panel members are acting as consultants” and that “every startup that enters the competition “gets support and help with their business plan and their strategy.” (a benefit so great that companies should be willing to pay the $4,995 even if there was no chance for a prize, he says). Here Hurley hits on one of my main pet peeves of poorly run angel groups – that they really are just comprised of out of work executives looking for consulting fees. Consulting projects are consulting projects. They should include a clear scope of work, deliverables, project timeframes, etc. To me Hurley’s “we’re really consultants” argument is a poor rationalization. How do you justify charging companies to enter your competition? Talk about all the feedback you give them, of course! You’re a successful business person – just put a dollar value on the few hours you plan to spend with each company and voila! Your “entry fee” is justified! Not so. Business people who are attempting to support their local entrepreneurial ecosystem should be liberal with their time and provide feedback and advice to startups without looking for cash or equity. I do this all the time – and not just with companies that we’re looking to fund (although everyone who gets in to pitch a VC gets feedback in my experience) but with people in the community who seek me out, with companies that we’ve turned down but who stay in regular contact as well as with people whom I’ve never met before but who take the time to email me and ask a question. All of my partners do the same, as do most of the VCs I know and, importantly, most of the successful executives I know. While not everyone can respond to every request (nor will they all have the background to be relevant) but the kind of “support” that Hurley refers to is given out for free thousands of times a day. To be clear, I’m not saying that there isn’t a role for paid consulting work or equity compensated advisers – just that there’s a difference between a longer term consulting or advisory relationship and “providing feedback.”

Revolutionary Angels offers an above-market equity deal to the winner of their competition. The article paraphrases Hurley as defending the group’s practices because the deal they offer to the winning company is, by venture and angel standards, a really good one: “By funding Revolutionary Angels’ investments from the entry fee pool, he says, the group has the ability to invest in startups that may never provide returns on the scale angel or venture investors usually expect.” Basically the gist of this argument is that because RA suckers companies into funding the actual investment that the group makes (not to mention leaving a large sum left over presumably to cover the group’s fees and expenses on top of the investment) they can offer a really good deal. He’s correct that by national standards the deal that they say they will offer is probably above market (they claim that the winner of the competition will receive $250k in exchange for 10% of their business). But the argument falls short. Scam 100 companies into contributing to your investment pool, pick one to win the lottery and call yourselves the champions of entrepreneurs? And then justify this activity as some kind of community welfare (funding startups that may never have the chance to get funded)? And this may not actually be all that good for the winning company either. While $250k for 10% of your business may sound like a good deal, it may create the start of a cap structure that prevents other investors from wanting to participate (because they’re actually funding the investment themselves) and could just as easily act as a market disruptor rather than a lottery win for the chosen company.

There’s simply too much demand for quality feedback. Revolutionary Angels is filling a key gap in the market. “These investors don’t understand the scale of the demand, Hurley says. “If people think everybody has access to experienced entrepreneurs, that’s just not true,” he says. “In my talking to entrepreneurs, not enough of them are getting access to the people who have been there and done that. There is a much larger pool of people who aren’t being served.”" Not surprisingly, I don’t buy this argument either (and think it argues that Revolutionary Angles is very clearly preying on those that just don’t understand the entrepreneurial economy). While I agree that there is a large demand for feedback and agree that not all entrepreneurs are receiving the feedback they’d like I don’t think this is a supply and demand issue – it’s a connection issue. Too many entrepreneurs don’t know where to turn (and thus are susceptible to the kind of scheme that Revolutionary Angels has set up). I want to be careful about placing too much blame on the victim here, but I do believe that entrepreneurs sometimes don’t think broadly or creatively enough about how to expand their networks and gain access to people who can give them advice and feedback. This is really the topic of another post (which I’ll try to get up this week). In the meantime Micah has a few ideas on his blog here.

Fundamentally my issue with Revolutionary Angels and groups like them is that I don’t believe that they put the entrepreneur first (which I believe is how the dynamic should work). Instead they ride the backs of entrepreneurs to fund their “investment” and take advantage of their respective position in a market in which both sides don’t have the same access to information. The CEO’s of the companies that participate simply don’t know where else to turn – Hurley and the Revolutionary Angels are taking advantage of this. And hiding under the guise of a “business plan competition” rather than just hanging their hat out as business consultants suggests that they’re simply preying on the aspirational dreams of entrepreneurs.

December 1st, 2009     Categories: Uncategorized     Tags:
  • Phil Sugar

    Wow I couldn't agree more. I can't believe they could get one much less one hundred to sign up.

    You are right as part of the entrepreneurial community its your duty to give back and help out others. (and that doesn't mean for a fee)

    This takes the pay to pitch to a whole new level. You do good job debunking the one rational these groups give (we're doing consulting) fine lay out the project complete it and get your fee. The other one which is just as bad is “the fee is to weed out people that aren't serious” The only people that should be weeded out on the basis of money should be….the angels.

    I had a couple of arguments with groups about this. Think about it if you charge anything to pitch, the only people that leave with less money are the entrepreneurs that don't get funded. That is sad. That's picking on the short bus kids. If it costs money to organize the event charge the angels, any cost really only benefits them: nice room, food, and/or drink.

  • http://www.ashimmy.com alan shimel

    Seth – hope this works this time. OK I agreed with your first post and wrote about it at ” target=”_blank”>http://www.ashimmy.com/2009/11/how-to-get-into-th… but after reading your second post and the Xconomy article and thinking about it some, I have to disagree. I think the problem is Hurley is apologetic for being a capitalist. No one at this table is in it for cumbaya's. Everyone is out to make money. He should just say that they are exploring a new funding model and not apologize. The market will judge them, not the VCs. I wrote more about this at http://www.ashimmy.com/2009/12/is-there-room-for-

  • http://www.andrewhy.de Andrew Hyde

    Thanks for writing posts like this, love reading them.

  • http://michaelbungartz.wordpress.com Michael Bungartz

    Wow… What's hard for me to believe (as an entrepreneur seeking funding), is that my fellow entrepreneurs would actually sign up for something like this. The unfortunate truth is either they must see some value that we are all missing (doubt it), or they lack the foresight to see they're getting a crummy deal for their $5k.

    But what really boggles me, are the numbers. Let's do the math… 100 participants x $5,000 = $500,000 in entry fees. $500,000 – 1st Prize ($250k) – 2nd Prize ($50k) = $200,000. Hmmm…

    Where's the other $200k going? Perhaps I should consider this model to fund my own business. If I could run a “Competition” the way these guys are, I wouldn't need to look for funding…

    Rock on Seth!

    • sethlevine

      zero risk for revolutionary angels and 100% of the updside… grrr

  • Randy Levine (Dad)

    Seth, what would you say if the pitch was that they were consultants who charged $5K for their services to review advise but also gave back by providing $250K to the best plan they saw (in return for a very small equity stake) as an incentive to professional investors to look at that company seriously. In other words, are you objecting to the mechanics (my hypothetical is the same mechanics) or to what they say they are? Think about it before you see my reason for objecting in the next reply.

    Secondly, if the CEO of Revolutionary Angels says they are really consultants then shouldn't the companies who fork over $5K be encouraged to get their tax ID and send them a 1099? I suspect that the tax treatment of an “entry fee” is a lot different than a consulting fee.

    • sethlevine

      it’s a kluged model either way, dad. if they are consultants, they should advertise as such, provide project perameters, deliverables, etc. if it’s a lottery the participants in the lottery should get the upside (i.e., the companies that contribute to the pool). they are neither (and bill themselves as “angels” – thus the name of their firm). so i’m really objecting to both.

  • Randy Levine (Dad)

    So do I object to the mechanics or to who they say they are? Both, of course, but primarily the mechanics. So I object to my hypothetical as well as to the reality. As an entrepreneur, if I want consulting services then I'll pay market rates for them and I wouldn't pay what has to be a premium that will likely go toward funding some OTHER start-up. As an investor or board member I would question a CEO closely on paying such a premium

    • sethlevine

      i strongly agree!

  • Phli Sugar

    Thought about this. This has to be some form of illegal gambling. I'm not a lawyer so that's not a legal opinion but think about this:

    I'm going to sell 100 chances at $5k a piece. First prize is $250k, second is $50k. I keep $200k. If I don't sell 100 the pool decreases.

    Does it really matter that the determination of the winner is a business plan?? It could be picking on football games, horse races, who has the highest card, fastest cockroach, whatever……you're taking money pooling it, giving big prizes to winners, and taking a cut. (40% is one hell of a cut….craps is about 2%, slots take about 8%, horseracing 15%)

    • sethlevine

      this is in part what makes me label it a “scam” although i think they’re safe from gambling laws . . .

  • Randy Levine (Dad)

    >>Does it really matter that the determination of the winner is a business plan??
    Yes, it does. Briefly, if it's purely chance then it's gambling; if skill is involved it isn't. I would think these folks could make a valid claim of skill here.

    Something similar went to the Supreme Court many years ago when a professional poker player deducted his travel expenses. IRS said no, he was gambling. Poker player said he was a professional using skill to make a living, so it wasn't just chance. SC had to decide, in effect, if poker is a game of skill or a game of chance.

    If you've ever played poker you'll know what they decided.

  • Phil Sugar

    Just because it involves skill doesn't mean its not gambling I can bet you that I can solve math problems faster than you and that is gambling.

    Placing bets on a horse-race or poker is certainly skill, frankly so is betting on sports. That does not however mean I can take those bets pool them and take a cut. Ask your local bookie if that's legal.

    I'm telling you there are very strict contest/sweepstakes/gambling rules. As a matter of fact many times games that aren't purely chance are specifically outlawed. The whole basis of many slot machines were that they were based on lottery and specifically not games of skill. For instance you can not build a slot machine where because I can hit a button faster than you I win.

  • Phli Sugar

    Maybe I should be more precise and call it a contest…….ever look at contest rules??? What is the first thing always in caps. No purchase required. I would say a $5,000 fee would be a purchase. There are reasons for these laws and the one of the primary reasons is because if not I could essentially hold contest which were basically gambling. I.e. put up $100 winner take all. or I could run scams.

    Now of course like many things small infractions are overlooked. Office pools etc. However when you start taking real money and giving real money….those are not overlooked.