Alain,

That's a good question, which I'd answer as follows: (a) just because someone says something on TheFunded doesn't make it gospel [grin], but (b) IN GENERAL, and taken as a rule of thumb, the advice is pretty good.

Where it breaks down is in the details, which is why the Angel Capital Association convened a panel to consider this very question, and ultimately came out with a specific, detailed statement on it, which is available online at http://www.angelcapitalassociation.org/dir_resources/entrepr....

Angelsoft's corporate (and my personal) philosophy is as follows: the primary determinant as to whether it is appropriate to charge a fee of any kind to an entrepreneur to pitch, is the answer to the following question: "If you represent yourself to be an investor (or group of investors), is your business model based in any way on the fees you charge entrepreneurs?"

There are a number of 'venture summits', and 'angel groups' and others who represent themselves as investors and charge large fees (often several thousand dollars, for application, appearance, 'training', presentation, diligence, etc.) to companies, because that's how they make their money, regardless of whether or not the company receives an investment (which it rarely does.) In those cases, the whole point of the business is to make money from the entrepreneur fees.

On the other hand, take as an example New York Angels, my own local angel group. We charge a $150 application fee to submit a plan. Is that any part of our business model, and do our members make any money from that fee? ABSOLUTELY NOT! Quite the opposite: while we charge entrepreneurs the $150, we charge OURSELVES $3500 per person per year to allow us to maintain a non-profit organization that enables us to coordinate investments in the first place! So in the case of the 37% of legitimate angel groups that have a similar policy, I/we (obviously) have no problem with the practice.

That said, there are two significant problems with your suggestion for contingency-only fees, one legal and one practical:

Legally, anyone who charges any type of contingent fee relating to equity financing MUST be a registered broker/dealer with the SEC. There are no exceptions to this, and no wiggle room. Since by definition no legitimate angel group is a Broker/Dealer, adopting this policy would immediately end organized angel investing in the US, and you'd be back to having to find angels at your local country club, or by paying an investment banker (who IS a B/D) to introduce you.

The practical problem is the perhaps-unfortunate-but-nonetheless-true fact of the Golden Rule of financing: "S/he with the gold makes the rules." If YOU believe that anyone should be able to send you their business plan and expect you to read it, and then invest in them, then by all means YOU should go forth and do it! But if the only people who are willing to make these risky investments are only willing to do so if you follow the procedures they have set up (for reasons which seem sensible to them), then either (a) it's worth it to you to do so, and you will, or (b) it's not worth it and you won't. But there's no percentage in telling such an investor that he or she should do it your way because YOU think it makes sense for THEM.

Just to put things in perspective, and show you how things look from the angels' side, Angelsoft currently processes over three thousand (3,000!!) funding applications every month. By investing unholy amounts of time, energy and money, we have now made the process so easy that the temptation is overwhelming for virtually every entrepreneur in the world to want to hit virtually every potential investor in the world with his/her plan. While this is understandable from the entrepreneurial side, it should be apparent that it is completely unworkable from the angel side, particularly considering that angel investing is a part-time activity which (given the risk, effort, et al) is a tenuous practice in the first place.

On top of that, another fact that needs to be considered is that the quality of funding applications varies widely (to put it mildly). YOUR plan for FairSoftware.net may be brilliant, incisive, carefully reasoned, and a logical investment for any rational investor...but that would be the exception rather than the rule [grin]. Looked at another way, if angels invest in somewhere between 1% and 5% of deals seeking funding, that means they are in effect (and in aggregate) making a series of value judgments, and rank ordering all 100% of the deals so they can choose those which, in their opinions, are the top 1-5 deals. A fair argument could be made that they make mistakes, aren't perceptive, have poor vision, etc. etc., and that in reality (as with college admissions), EVERY one of the top 10% should be funded.

You could further say that the NEXT 10% down should, in an ideal world, be fundable if we could only match the specific deal to the specific investor under certain specific circumstances. And then, since we are entrepreneurs ourselves with faith in our ilk, let us say that the NEXT 5% we should fund because, even though the plan doesn't make sense and the financials are unrealistic, this might be a really good potential entrepreneur who could break the mold and defy all of our investing experience to date.

OK.

But...that still leaves a full 75%(!) of aspiring entrepreneurs seeking funding for ideas which are clearly and unequivocally inappropriate for an outside angel investment. In my experience, #26 might be the kind of deal for which I'd conceivably take a meeting, but know within the first minute or two that it simply wasn't fundable; #50 might be a deal which might make sense in theory, but not in practice ("I want to start a new, generic online social network"); #75 is a deal that should never have even been put to paper ("I've got a website that will obviously put Google, Yahoo and Microsoft out of business in six months!"); and #100 is from someone who is not necessarily playing with a full deck ("Send me $100 million to publish my book which will instantly result in world peace.")

So, Alain, if you would like to volunteer to read through 3,000 business plans a month and give me a quick write-up on each of them (at your own expense, of course), I would be delighted (and I'm stating this here in public) to give you (subject to appropriate legal structure, etc, etc. etc.) a 1% contingent interest in any investment I end up making in any such deal you send me.

You see the problem. :-)

So therefore, how can we establish a system, given our free-market, capitalist economy, to try to get smart money into good deals? Having been doing this for nearly a decade, I can attest to the fact that it's not easy. Angelsoft is (I believe) the best approach to date, and we are constantly iterating it to maximize the aggregate return to the entire system, which will in turn help entrepreneurs and investors, and make money for Angelsoft as a commercial entity.

But, as with everything else in a free market economy, each player has to make a decision for him or herself as to whether doing something is economically (or otherwise) justifiable. At Angelsoft (unlike ANY other site, service, company or institution) we freely publish our full, live statistics online (at www.angelsoft.net/industry) so that we can be as transparent as possible. We also make our Group Finder (without close second the most comprehensive on the planet) available for free, and we make it trivially easy to apply for free to as many groups as you want. And if, after reviewing our Investor Community posting opportunity, an entrepreneur determines that it makes sense to post his or her plan there for 30 days for $250, then we welcome them. If not, we completely understand, and invite them to continue to use the rest of our tools for free.

I apologize for the length of this post, but you were kind enough to ask, so I figured you deserved a full [perhaps too full?] reply.

-David S. Rose, CEO, Angelsoft