The first question is should it cost anything? After all it is the Investors who have money, so why should they charge in order to pitch to them?
Well, actually almost all Investors don’t charge a penny for entrepreneurs to present an investment case to them.
Investors are not looking to make money from people presenting their opportunities; they want to make money from partaking in the business itself.
You may well ask in that case, where do the costs come in?
In theory, if you could identify and contact yourself prospective Investors, there would be no costs (other than legal or due-diligence fees by your own solicitor/accountant).
But not everyone knows such a person, so what if you don’t have access to an Investor? Whilst venture capital companies and funds can easily be found, they generally don’t invest in smaller businesses, or normal start-ups (exceptionally high-tech or bio-tech businesses occasionally get funded that way).
The normal young business has to rely on private individuals – Business Angels, for investment and these people do not want to appear in a public directory or people would be camping on their doorstep to talk to them, never mind the security issues.
They tend to work through intermediaries, who will protect their privacy and supply them with interesting potential investments. This is where the costs come in. The intermediaries will charge for the work of connecting people with opportunities to people who want to make an investment.
Who pays these charges? Surely the best placed person to pay them is the investor, not the entrepreneur. Whilst there are some Investors who are willing to pay for opportunities to be presented to them, most are not. They after all have the pick of plenty of investments, they don’t need to pay. Whereas the entrepreneur is competing against all the other places that an investor could place his funds, it comes back to supply and demand.
Right, so the person looking for the funds pays for an intermediary to help him find an Investor, how does that payment work?
There are 3 ways in which such intermediaries, sometimes called business angel networks, get paid. Firstly there is almost always an upfront fee, with no guarantee that you will definitely get an investment. This initial fee helps to pay for the preliminary work done and gives an indication that the person looking for funding has thought it out and is serious in what they are doing.
Why no guarantee? Just think of the range of proposals that will be coming through, some will be very good, but others will not be so good. Also, it depends on investors liking the business’s management and many other factors not controllable by the intermediary – it is not possible to guarantee that every proposal will get funded.
The amount of this upfront fee will vary a great deal. Some will charge many thousands; one of the most well known ones has an average upfront fee of around £5k. For that they will ring round their list of Investors and see if anyone is interested.
Where the interaction is by allowing entrepreneurs to come along to a “speed pitching” event the upfront fee is £800 (plus another £400 for every additional pitching event).
Depending on the company, you may get additional help in refining your proposal or pitch included in that fee.
So not cheap so far – but there’s more…
The second way they charge is to levy a “success fee” on top of the initial payment. This is around 4 – 5 % of any money raised. Many entrepreneurs might say they don’t mind paying a success fee, but don’t like the idea of an upfront fee, but generally that’s not going to happen, partly for the reasons mentioned above and partly because everyone would try for funding if it cost nothing initially. There would be a lot of low quality proposals and the intermediaries wouldn’t be able to handle the quantity for the price.
If that wasn’t enough, the third hit comes when some intermediaries also want 1 – 2% of the final company in shares. You can see that it can all add up to a daunting amount.
That is why when I set up Company Partners I looked for a more efficient (hence lower cost) way to connect those with opportunities and those looking for interesting investments.
After trying different models we arrived at the concept of a member’s site where a small monthly membership fee of about £30 was used and the site’s database was programmed to do most of the work, making it very efficient. I also did away with every other charge.
Now that’s good news not just for the entrepreneur, but also for the Investor, because when a young business pays thousands to be connected to that Investor, it doesn’t just come from the personal account of the person running the young company. It comes right out of the business that the Investor is putting his money into. In fact most of the intermediaries tell the fund seekers to add on top of the funds required, the fee that they will charge.