I was talking to an entrepreneur friend of mine several months ago. We were talking about our capital raising philosophy, Designing the Perfect Investor™ and our new service, a custom search of our InvestorFind™ curated investor database. He told me that he had just signed up with a “paid angel group” and he was really enthusiastic about it.
This well known angel group made him a lot of promises – they were going to have him present to their extended group of angels all over the country as well as introducing him to “family offices” that they claimed to have relationships with. It sounded great to him, particularly the promise of access to potentially deep-pocketed family offices – his startup had already received seed funding with very supportive investors, and so these efforts were to raise a bigger follow on round.
These big promises convinced him to spend about $5000 and several months of time working with their (so-called) mentor to get all the documents that the group required from them. I caught up with him recently and he’s hit a snag. The mentor doesn’t like the entrepreneur’s proposed valuation for this follow on round, so he’s basically been locked out. He’s paid the money, done what they asked, worked with the mentor, but no exposure, no introductions or presentations to potential investors (much less the very important family offices), and certainly, no money….Don’t forget, no matter the elements of your funding strategy, it takes 6 to 12 months to raise a funding round and my friend has already spent 3 months (or more!) spinning his wheels with this group.
Now, you may have heard me say that valuation is tricky! Valuation is usually the result of a negotiation between the entrepreneur and lead investor(s). There’s no magic number and valuations (like the P/E ratio in the public markets), can vary dramatically based on characteristics of business, investor appetite for risk and investment-type as well as external factors, such as the broader economy and the fate of public markets.
So, back to our entrepreneur – who is struggling with this paid angel group because the “mentor” doesn’t like the proposed valuation! Yes, it is a form of negotiation – but the entrepreneur has already paid $5000! Now, as I talked to this entrepreneur, it became clear that part of the problem is that this particular angel group was NOT in on the seed round. The Seed investors had bought in at a dramatically lower valuation, which is normal. (Remember, your startup needs a funding pipeline!) I explained to the entrepreneur that the “mentor” was trying to enhance the position of the group’s members because none of their members had the benefit of the “lower” price of the Seed round. It seems obvious now, but this issue would have been an important thing for the entrepreneur to know BEFORE paying the up front fee.
I am not the only person helping entrepreneurs to express serious concern about angel groups that charge entrepreneurs for access. I know why the groups do it, but I really don’t know why entrepreneurs pay these fees. It’s expensive and, as my friend demonstrates, riskier than it sounds! A custom search of our InvestorFind™ curated investor database costs $1000 (USD) if you are new to the VentureWrench community and are not already a client, but only half that ($500) if you have already signed up for our course, Designing the Perfect Investor™. Whatever we find in our search, a minimum of 20 to 25 Perfect Investors, and usually many more than that, you get the info on those investors and develop your fundraising strategy accordingly. Because they are Perfect Investors – already waiting for what you have to offer – you don’t need hundreds of them! Saving you time, money and increasing your odds of capital raising success.
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