Loosely Coupled

Why Paying to Pitch is Necessarily a Scam

tim.nospam@nospam.marman.org (tim) — Thu, 29 Oct 2009 09:06:00 -0500

There's been a bit of a backlash recently - spawned primarily by Jason Calacanis' post - against angel groups that charge entrepreneurs relatively significant sums to pitch their ideas. As Jason puts it, this is an “injustice” and an “abuse of power” – that the poor, desperate entrepreneurs shouldn't be footing the bill for any expenses for the rich angels they are seeking money from. In principle, I think we can all agree with this.

Much of the focus here has been on exposing the bad behavior of these investors, but I think the problem is deeper than that. In other words: By paying to pitch, entrepreneurs are actually hurting their already slim chances of raising money.

Early-stage ventures have a high rate of failure.

We all know that high-tech ventures – especially in the nascent stages – have a very high rate of failure. David Rose shed some last , he expects seven out of every ten investments to bust, two to make their money back, and one to carry the rest of the portfolio. (I may have the specific numbers wrong, so feel free to correct me). Now keep in mind - this isn't one in ten companies that pitches him - this is one in ten that David actually chooses to invest in. One has to assume that David and his peers get pitched by an order of magnitude (or two) more companies than they actually invest in.

Paying for access to investors is likely a negative indicator of success.

There are a variety of motivations behind why a company might pay for access to investors, but for the most part none of them reflect positively on the company’s chance of success.

With the rise of social tools, investors (both VCs and individual angels) are increasingly more accessible than ever before. Entrepreneurs with a good team, product and/or idea should be able to get a meeting without paying for the right to pitch. Moreover, if an entrepreneur is not resourceful or confident enough to get a meeting with a potential investor, why do we think said entrepreneur will be any more resourceful in terms of actually building a successful business (which we already established is a difficult thing to do)?

In other cases, entrepreneurs were resourceful enough to get introductions, but the investors declined to hear their pitch. If this happens repeatedly, it should be a pretty strong signal that there is something fundamentally wrong with the business or how it is presented. Paying money to pitch isn’t going to fix those problems.

Another group of entrepreneurs who pay to pitch are those who are desperate, as mentioned in Exhibit B. First of all, if you're running out of money, spending more on it to pitch doesn't seem like the best route to me. And, just like in dating, if you're desperate for cash then investors are going to see that and are not going to be as attracted to you. Again, this is a situation where paying just to be in front of the investor isn’t going to solve underlying problems.

Sophisticated investors should not invest in any company that pays to pitch them.

If an investor expects even the majority of the small group of businesses that make the investment cut to fail, then he or she would be foolish to invest in a company that has demonstrated that they are more likely to fail than the average business. First of all, if they did chose to invest, they are effectively taking valuable resources away from the company which will hurt its chance of being successful and providing a return on said investment. Moreover, it should give the investor pause in terms of how the entrepreneur may spend the investor’s money going forward.

Understanding this dynamic, a sophisticated investor should not invest in any company that paid for that access.

I recently had an exchange with Joe Rubin from Funding Post about the Perfect Venture Conference they are running. The event will bring "20 early-stage technology companies" and "40+ VC and Angels" together for a full day of one-on-one pitches. The fee for this "exclusive opportunity" is $2,500 per company.

I know that everyone has a different definition of what "early stage" means, but I think we have to interpret this here as someone who has bootstrapped or raised a small amount of seed money and is looking to raise their first institutional round. After all, if you've already raised a significant angel round or other institutional round, you probably don't need to pay for access to investors (since access to follow-on money and introductions is a big part of the investor value proposition).

So, we’re pretty much dealing with companies who haven't raised anything significant yet and probably don't have much in the way of a product. Let’s assume that all of the investors listed actually attend the event (which some of the evidence Jason selected suggested otherwise for competing groups) – the fact that these investors paid to pitch should still raise big red flags in the minds of investors. I’m going to make a gross generalization here, but I think it’s safe to say that the companies pitching here are probably the best of the best.

When I passed this feedback along to Joe, he defended the price by saying that it was cheaper than their previous events which always sold out. What Joe fails to understand (or at least admit to me) is that this isn’t a compelling data point for the entrepreneur. In fact, the only thing that tells me is that there were at least 20 companies desperate and naive enough to pay to be able to pitch last year.

His pitch would be much more compelling if he could show that a greater percentage of companies that present at his conference get funded as compared to those who connect directly and pitch for free. Of course, I’m arguing that the opposite is true – that those who pay to pitch at these events are hurting their chances of being funded.

Advice to fellow entrepreneurs

Before you consider paying, reach out to investors! Personal introductions are always better, but I think you'll be pleasantly surprised to see how many investors are willing to meet with you even if you cold call. Quite simply, it’s just not as hard to get an investor to hear your pitch as these prices suggest. (Now, if these fees actually improved your chances of getting money, well, then, sure that would be worth it).

As I said above, if a number of investors decline to even hear your pitch, this suggests that there may be fundamental flaws in the business or how you're presenting the business. In either case, paying to get in front of the investor is not going to solve these issues - and both need to be solved before any investor is really going to think about writing you a check.

More importantly, there are a lot of great free events out there that will both help you connect with investors and get mentoring and feedback. If you’re in NYC, you should check out the Entrepreneurs Roundtable, organized by Centrl founder Murat Aktihanoglu. Murat brings in a different investor each month to meet with entrepreneurs, provide feedback on their pitches, answer questions (both general and specific) and so on. In fact, he’s in the process of connecting early-stage startups with mentors who will help them refine their pitches to be delivered in the January meeting. I can all but guarantee this will be much more useful than any of these “pay-to-pitch” events discussed above – and this is free.

Speaking of which, nextNY offers many free events in NYC, some of which are pitch/investor focused (and you can always organize one of your own. With Nextburgh, I hope to eventually be able to help organize similar events in Pittsburgh.

Oh, and what about angel groups that charge a small fee to apply?

New York Angels – like many other angel groups – charges a non-refundable $150 fee to apply. I’ve heard David and others defend this fee in that, aside from covering expenses, it also provides a degree of “filtering”. In other words, the fee structure prevents “frivolous” applications, or at least covers the cost of having to “waste time on them”.

These fee structures are certainly less egregious than those $10,000 fees we talked about above. I certainly don't think there's any malicious intent here, nor do I think that the negative indicators that I discussed above would necessarily apply here. (To that point, I think the respective portfolios of NY Angels and Keiretsu Forum support this – NY Angels’ portfolio certainly seems more impressive, at least to me).

That said, at the risk of alienating David and other NY Angels, I still think this is an abuse of the power structure and these fees are bullshit. I can only hope that this discussion sheds light on this and maybe causes them to reconsider - or perhaps at least refund the fee to companies that reach a certain quality bar (such that it would truly be a filter, to see if you’re serious/far along enough to pay).

9/11

tim.nospam@nospam.marman.org (tim) — Fri, 11 Sep 2009 21:08:00 -0500

8 years later – and on the eve of my 30th birthday – I figured I would once again repost what I first wrote here several years back.

On the morning of September 11th, 2001, I went to work at 1 Liberty Plaza across the street from the World Trade Center. We happened to have a global department meeting that morning, so I had passed through the transit hub at the base of the WTC earlier than usual - 7:45 instead of 8:45.

I still remember the sound of the first plane. I was in a conference room on the 12th floor facing south, so we couldn't actually see what was going on at the time. The paper and ash looked like confetti, and our first reaction was that it was some sort of ticker tape parade.

Without television or radio, we had no sense of what was going on. I called and woke my girlfriend who was living a few blocks south at the base of West St. My plan was to come down to her apartment and figure out what to do. I watched the second plane hit, and by the time I got to her building it had already been evacuated.

Standing in Battery Park, I stared at the burning towers. It was only as I watched the first tower fall that I began to understand the gravity of the situation. I simply stood there in shock with countless others as a cloud of dust and debris and God knows what else enveloped us.

I was on the FDR ramp on my way uptown and did not see the second tower fall. At this point, everything was pretty much a blur. Things hadn't quite sunk in, but all I could think about was where my girlfriend (now wife) was. I finally got through to my parents on a landline. Tara was ok. She wisely ran to the ferry terminal and managed to get on the last ferry off of Manhattan and was making her way to a friend's apartment in Jersey City.

All trains leaving the city were closed, so I eventually ended up at Chris' apartment, a good friend who I worked with and who left the office with me. We eventually met my father for dinner who was still in his office a few blocks away coordinating things. I don't remember what I ate or what was said that night. The only thing I really remember was how grateful I was to be sitting with my father and a few close friends, knowing my mother and sister and girlfriend were all safe.

The greatest gift was waking up on my birthday the next morning at home with those I love and learning that none of my family and friends had been taken. There were 2,749 other families that were not so lucky, and my heart goes out to each and every one.

I still don't fully understand the impact that day had on my life and I don't know that I ever will. I do know, however, that I never forget September 11th, 2001.

Friday Fun: The Quick Brown Fox Jumped Over the Lazy Dog

tim.nospam@nospam.marman.org ([3]) — Fri, 31 Jul 2009 13:19:58 -0500

I’m sure you’ve all heard the titular phrase, which contains all of the letters in the English alphabet and is often used to test typewriters or keyboards (or, these days, to showcase fonts).

Well, it really does happen.

(via Caroline)

Fixing LCD Image Persistence on Multi-Monitor Systems

tim.nospam@nospam.marman.org ([3]) — Thu, 23 Jul 2009 08:59:29 -0500

When I first installed Windows 7, the power management was not working properly and the screensaver would not kick in nor woo. After I forgot to manually turn off the monitors one night, Something was wrong with power management when I first installed Windows 7 and my monitors did not shut nor did the screensaver kick in. As a result of that first night, I noticed a terrible “ghosting” effect that resembled the burn in of a CRT.

Fortunately, it turns out that burn in (or, more accurately, image persistence) is not permanent with LCDs. Though it is said that letting the monitors “relax” for a few days will fix the issue, it didn’t go away for me. Another common solution, however, is to use a solid white image as a screensaver – this basically burns in a white image and eliminates the ghosted image that was there before.

Another approach to removing LCD image persistence is to first create a solid white image and display the image as a screensaver covering the entire display area for an extended period of time, which operates the pixels in a uniform ON state rather than an OFF state as with turning the display off.

One issue I ran into though is that all of photo screensavers didn’t quite work with multiple monitor setups. Rather, they would show the white image on the primary monitor and have the other screens blank. Though this wouldn’t cause new burn-in, it obviously wouldn’t fix the issue that I had on each of my three monitors.

However, I was able to use UltraMon to achieve this, using the default integrated screensaver and changing the background color to be white. (Speaking of which - even with the new keyboard shortcuts in Windows 7, UltraMon is essential for multi-monitor setups. A new version was just released with proper Windows 7 support as well).

So, my monitors turn white after 2 minutes and then turn off after 30 minutes (based on the power settings). I’ve been running this for a day now and already I’ve noticed some of the ghosting is reduced. I’ll update this post again after a few more days to see how well it works.

Oh, and if you’re going to do this, it’s probably a good idea to reduce the brightness on your monitors so you don’t burn out the backlight bulb. Don’t make it a long-term thing either – once you’ve fixed the image persistence, you can go back to your previous settings.

As a side note, if you’re having similar issues with power management in Vista or Windows 7, there’s a new command line utility that can help you troubleshoot the problem. In my case, I was easily able to identify a USB driver that was preventing the system from entering the suspend state, and the issue was fixed as soon as I updated that particular driver.

Augmented Reality on the iPhone

tim.nospam@nospam.marman.org ([3]) — Tue, 14 Jul 2009 14:45:08 -0500

Wow… this iPhone app from acrossair is just too cool (via The iPhone FAQ).

Instead of a static map, Nearest Tube displays subway information in real-time, overlaid in 3D on top of live video of the user's surroundings. Holding the iPhone 3GS horizontal will show arrows pointing to different train stops, and tilting the device upwards will overlay signs in the direction of different stops. These signs look like a heads-up-display, and give more information about how far away the station is and what lines connect there.

You really need to see this thing in action:

If you ask me, that’s much cooler than that app that’s been getting a lot of press about where to stand on the subway. (That’s something that is most useful during rush hour and most New Yorkers have figured that out already!).

Weekend Reading #5

tim.nospam@nospam.marman.org ([3]) — Fri, 24 Apr 2009 06:36:29 -0500

It's a big one today as I'm still getting caught up on a backlog from my treatment weeks.

General/Business:

Startup:

Technical:

Entrepreneurship, Ambiguity and Risk

tim.nospam@nospam.marman.org ([3]) — Tue, 07 Apr 2009 09:06:00 -0500

It's now been a little more than a year since I left Goldman Sachs to work on Notches full-time. Initially, many of my family and friends talked about how impressed they were about me taking such a "risk". In fact, that's the thing that scares most people out of starting their own business – they just consider it too "risky" to be out there on their own.

I always said that what I'm doing really isn't all that risky, since I had just finished my law degree and leaving Goldman was an inevitability. The big question was whether I would try to follow the well-worn legal career path: join a law firm, bill a lot of hours and eventually make partner or try to become in-house counsel somewhere.

Ultimately, I wanted to forge my own path. I decided to start my own business because I felt it gave me an opportunity to put my technical, legal and business skills and creativity to work in a way that I could create value, in a way that was appreciated instead of marginalized. Building something of your own is certainly rewarding, but I think what really appealed to me were the possibilities.

In other words, there was no road map. There was no set path – entrepreneurship is, by definition, creating something new. It was these possibilities that I did not see at Goldman or in a legal career that really rang out to me.

As Reid Hoffman put it, in the current economy and job market, we're all entrepreneurs now – but that isn't always true especially within larger organizations.

Jim Collins (of Built to Last and Good to Great fame) made this point very well in a recent Inc. interview.

How do you define entrepreneurship?

I take a broad view of it. The traditional definition -- founding an entity designed to make money -- is too narrow for me. I see entrepreneurship as more of a life concept. We all make choices about how we live our lives. You can take a paint-by-numbers approach, or you can start with a blank canvas. When you paint by numbers, the end result is guaranteed. You know what it's going to be, and it might be good, but it will never be a masterpiece. Starting with a blank canvas is the only way to get a masterpiece, but you could also blow up. So, are you going to pick the paint-by-numbers kit or the blank canvas?

It has to do with your ability to handle risk, no?

Not risk. Ambiguity. People confuse the two. My students used to come to me at Stanford and say, "I'd really like to do something on my own, but I'm just not ready to take that much risk. So I took the job with IBM." And I would say, "You're not ready for risk? What's the first thing you learn about investing? Never put all your eggs in one basket. You've just put all your eggs in one basket that is held by somebody else." As an entrepreneur, you know what the risks are. You see them. You understand them. You manage them. If you join someone else's company, you may not know those risks, and not because they don't exist. You just can't see them, and so you can't manage them. That's a much more exposed position than the entrepreneur faces. But there's lower ambiguity on the paint-by-numbers path: very clear but more risky. The entrepreneurial path: very ambiguous but less risk. Of course, the truth is that it's all ambiguous, anyway. If you think you can predict the future, you're crazy.

This distinction between ambiguity and risk is an important one. Starting a capital-efficient technical business wasn't really risky, in the sense the sense that I really stand to lose anything. Mostly, it comes down to opportunity cost and even there it's not clear I really lost anything. Though I do not collect a salary, we have adjusted our lifestyle accordingly, have a very low cost basis, and saved for this upfront. On one hand, I could have made, say, $150,000 if I joined a law firm in NYC as a first-year associate. On the other, I have gained experience and knowledge and had leadership opportunities I would have never had at a law firm or at Goldman. Ultimately, I have to believe that I will have even better opportunities available to me now that may be worth well-more I have opportunities available now that I never would have had last year.

Whether or not Notches is ultimately successful, it has certainly taught me that I'm happier when I follow an entrepreneurial path – not because of the risk but because of the ambiguity. I relish the ambiguity, because the ambiguity is what brings possibility.

The Crash-Test Solution: Using physics to predict economic downturn

tim.nospam@nospam.marman.org ([3]) — Fri, 03 Apr 2009 09:18:17 -0500

There's a really interesting article in the latest issue of Portfolio that suggests that the latest economic downturn wasn't an unpredictable black swan – but rather that we're using the wrong tools (and wrong people) to try to detect it.

A small but growing cadre of scientists are arguing that our current crisis was in fact predictable and that the technology exists to make sure that it won’t happen again. The problem may be that we’ve used only economists to try to solve our economic predicaments. Instead, the solution may be found by physicists and other scientists accustomed to studying complex systems.

To anticipate the next crisis and find our way out of this one, we may have to cast off economic and financial dogma and adopt ideas inspired by physics and other natural sciences, disciplines in which the notion of unstable and unpredictable systems is nothing new. For instance, the technology now exists to go beyond economics to build a massive, complete computer model of the modern economy, from the corner store to the city bank and the Federal Reserve.

With such a model, physicists would be able to track changes in the economy dynamically. There have even been calls for an ambitious effort akin to the Manhattan Project, which built the atomic bomb, to bring the most sophisticated mathematics and computer modeling to bear on managing the world’s economies more aggressively than has ever been attempted.

It's clear that our economic woes are in part because of increasingly complex and intertwined. Bailouts are necessary simply because the death of a single (even small) corporation (which is what I and most other "true capitalists" might prefer) can have a dramatic ripple effect on the rest of the ecosystem.

On that note, I can't think of a system more complex and intertwined than nature; it will be interesting to see how science can be applied to this other "unpredictable and complex" system.

Weekend Reading #4

tim.nospam@nospam.marman.org ([3]) — Fri, 27 Mar 2009 16:59:00 -0500

Startup:

Technical:

Weekend Reading #3

tim.nospam@nospam.marman.org ([3]) — Sat, 21 Mar 2009 08:29:00 -0500

General/Business

IntenseDebate Plugins: Blog Comments as a Platform - building an ecosystem around their own JScript plugin
Reid Hoffman Tells Charlie Rose: “Every Individual Is Now An Entrepreneur.”
Doctor's Orders: Don't Review Me Online
Framing Facebook's Growth
Writing Decisions: Saving space without losing meaning
A signature cadence

Startup

Technical