Dec 1 2009

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.