One of the great things about the U.S. economy is the investment model where those with capital can promote innovation by providing money to brilliant entrepreneurs who can't afford to start a business on their own. But the New York Times' small business blog today has a post that turns that idea on its head. It asks whether startups should have to pay venture capitalists to pitch their ideas. I think that's an awful idea, because it necessarily deters cash-poor entrepreneurs from bringing potentially brilliant ideas to investors. But I can see the other side too.
Here's the general idea, via the NY Times:
Most United States-based competitions allow entrepreneurs to apply and compete for free. The Women 2.0's Pitch Night start-up competition charges $25 to process applications. Others ask teams to pay a few hundred dollars for their own food, lodging and travel.
But a Boston-based angel investment group called Revolutionary Angels believes $4,995 is a fair fee. This October, the fund launched its inaugural business plan competition with a "participation fee." The group accepts applications for free but will charge 100 qualifiers to attend its finalists' event, where they can pitch ideas to a panel of investors and entrepreneurs and win a top prize of $250,000 in seed finance.
I think $4,995 is an awful lot of money for a startup to come up with, particularly when entering a contest precisely because it does not have enough money to start up a company itself. I would worry that it would create too high a barrier for some startups and could ultimately stifle innovation. Besides, why should these entrepreneurs have to pay in order to expose their idea to investors who would end up profiting from it anyway?
Here's the investors' argument:
Competition fee money will help build Revolutionary Angels' portfolio and events, he acknowledges: "We are also a company. But nobody's trying to get rich [on fees] here. We're dedicated to supporting entrepreneurs, and bringing early-stage financing opportunities to otherwise overlooked great companies. It takes some overhead to achieve this."
Yes, but the overhead is part of the venture capitalists' investment. It has to be. They're paying for the opportunity to be exposed to a showcase of innovative concepts of which they can potentially make a great deal of money from -- without actually being responsible for any of that innovation. So I think paying for a contest's overhead is a pretty poor reason for charging a lofty entrance fee.
However, I think a different reason might hold more water. Having a higher entrance fee could weed out the more marginal startups that would essentially waste investors' time. For example, if you're a startup who knows you have an incredible idea on your hands, you can probably find a way to dig up $4,995. The entry fee would be worth it. If your idea is kind of interesting, but probably won't impress many investors, then you'll be less likely to take that risk.
Frankly, I think any truly revolutionary innovation won't be harmed by such entry fees. If you have a remarkable enough idea, you probably don't even need a competition like this in the first place: you could knock on a venture capitalist's door and impress it with ease. It's those ideas on the margin that really seek to benefit from a competition. Of course, it's those same startups that are most likely to be deterred from a high entry fee.
But not all those ideas are useless, and some might be worth pursuing, even if not earth-shaking. I worry that such entry fees create a culture where creativity will only be sought from those who have some money, rather than from anyone. That doesn't make for the best capitalist economy. Though, I suspect it also won't result in the most successful venture capitalists, so I'm not sure that such fees will ultimately endure.
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