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1. Bradley Joyce

   October 7, 2009 | 12:56 pm

   

   While I don’t always agree with Jason’s methods and mannerisms, I 100% agree with his point… That it is *absolutely ridiculous* for these types of organizations to be charging startups and entrepreneurs to participate.

   If they REALLY had helping entrepreneurs and promoting entrepreneurship, they would be charging angels/sponsors to participate and not the entrepreneurs.

   The “screening” argument is complete BS. Again, if you’re really about helping entrepreneurs take the 10 minutes it would take to review an application or have a quick phone call with the company instead of making it a game of who can pay and who can’t

   Reply
2. Steve

   October 7, 2009 | 3:37 pm

   

   Hi Bradley, thanks for coming by and commenting.

   Well, I think it might benefit you to learn a little bit more about how the Keiretsu Forum works before leveling those claims. There is much more involved than “a 10-minute screening process”. There are plenty of Angel “Hobby Clubs” who do just that. The “screening” argument is actually NOT “complete BS” at all, and there is much more to it than screening; it’s usually about a 6-month total engagement the entrepreneur is involved with, before getting funding.

   I’d like to invite you to join me as my guest at the Silicon Valley, or East Bay Keiretsu Forum meeting, so you can observe the process, meet members, watch entrepreneurs pitch, and gain a better sense for all the process, work, contributions, and positive help we provide entrepreneurs.

   Also you should know, the Keiretsu Forum rarely accepts “concept stage” businesses that aren’t generating revenue. We are more focused on businesses that are already “going concerns” generating cash flow, that want to take it up to the next level. Not always, but 99% of the time.

   Thanks again for stopping by. If you’d like to join me at a meeting, either call me on my cell at (408)410-3857, or contact my assistant Danilo using the form on the “Contact” page.

   Sincerely,

   -steve b.

   Reply
3. Brandon

   October 7, 2009 | 11:09 pm

   

   You state “Calacanis and Arrington are partners in the Tech Crunch 40 (and it’s 50 now, btw) conference, from which they make big bucks off of entrepreneurs.”

   To what are you referencing for their “making big bucks off of entrepreneurs”? Jason and Mike raise awareness for truly great startups—great teams with great ideas—which leads to significant VC investments. They charge no fees to entrepreneurs. If you’re going to argue that they’re exploiting startups through the publicity TC50 garners them, then you might as well argue against capitalism.

   Reply
   • Steve

     October 7, 2009 | 11:58 pm

     

     Hi Brandon,

     Thanks for stopping by and commenting. OK, the Tech Crunch 50. I am a daily reader of Tech Crunch, of course – like everyone else in the Valley. I tell my students at Cal Poly, it is the most successful technology business blog in the world.

     My question is, why do two uber-rich and successful people like Arrington and Calacanis feel the need to disparage others, perhaps people who are way more classy and grounded than themselves, in order to further promote themselves? Despite their success, they seem to be driven by some kind of very dark anger, or rage. Very misplaced, their attacks. They are in prominent positions in the tech industry, with the top venture firm in the world supporting one of them; yet they resort to this kind of behavior. There is something drastically WRONG there.

     Last year, Mr. Arrington was speaking on a panel in Europe and someone that he had deeply antagonized through his blogging, ran up to him and spat in his face (well deserved, by his own admission). I admired that he took a month off and “sat on a beach” (in Hawaii) to re-think how he relates to the world. But it didn’t seem to help, as a couple of days ago he did a video interview where he declared “DEMO MUST DIE”. What is it with Michael and Jason, have they just returned from an Al Queda training camp in Pakistan??

     I don’t really think it’s very funny that Jason is posing as Bin Ladin. Bin Laden has caused the death of over 400,000 people (including over 7,000 American Citizens) since 9/11/2001, and along with Mullah Omar, has called for the death of four million American Children. I have two children, and take that very seriously. Al Queda has stated that in the future, they will detonate nuclear weapons in 20 US cities, all on the same day, wiping us out. And that could happen. Americans are dying every day fighting Al Queda in Afghanistan and Pakistan. Real funny, Jason. NOT.

     Michael and Jason may not charge entrepreneurs, but that are “making the big bucks” off of leveraging them. I think they have gone off the deep end, and have lost all respect for both of them. Disgusting!

     -steve

     Reply
4. Jennifer

   October 8, 2009 | 2:25 pm

   

   Everyone knows that Jason is notoriously arrogant and cocky… but the only thing I haven’t figured out is if it is all show or not. Does Jason really have the over inflated ego he constantly projects… or is he doing it on purpose for link bait/publicity purposes?

   I’m more impressed by true A-Listers such as Steve Jobs or Bill Gates who have moved way beyond all the material obsessions like Jason’s constant talk about sushi, Brentwood, celebrity poker games and his Orange Tesla.

   I would have to guess that his cockiness is real which works in some ways… but he is also walking on thin ice and could fall into the douchebag category.

   Somewhere down the road, all of the douchebag-i-ness has gotta catch up with him.

   Reply
   • Steve

     October 8, 2009 | 3:29 pm

     

     Thanks for your thoughtful insights, Jennifer.

     Well, business partners Calacanis and Arrington have developed very abrasive personas which seem to be working for them. Calacanis is a Sequoia-funded CEO, and Arrington runs the top (by #unique visitors/month) tech business blog on the planet.

     However, there is that Karma thing that you point out. Last year after a conference attendee in Europe ran up to Michael and spat in his face, to his credit he announced he was taking a month off to “set on a beach without a laptop and reflect my style”. He did do it, too (in Hawaii). I don’t know if he’s changed his style, but his partner Jason seems to relish annoying as many people as possible, whether he speaks the truth or not.

     Great point about the materialism and egotism. In my 30’s, i was sucked into that a bit but today my six and eight year old are about a 1,000% (actually higher) priority, and joy than anything material I’ve ever had!

     Only the test of time will answer the questions you pose. We live in a new era of media where almost anyone can become famous, even if it’s because they behave like a colossal jerk!

     Reply
5. Bob Crimmins

   October 9, 2009 | 10:23 am

   

   Here is what I think I just read:

   - 50%-60% of starups who pitch to Keiretsu get funded
   - Investors have enjoyed a 27% IRR on their Keiretsu deals

   If this is accurate then why charge the 40%-50% of startups that don’t get fund one thin dime, let alone $1K – $6K?? Keiretsu investors are clearly doing well and those returns are derived from the success of the STARTUPS… not Keiretsu. Keiretsu provides a screening service for the angels. True enough, Keiretsu is also amplifying the message of the startups but getting them in front of lots of angels they wouldn’t have been in front of — but they are, by definition, the ones with no money… at least before they pitch and win. Why not charge startups who actually get funded $2K – $10K after they receive the funding — and in cases where the startups doun’t get funded, just admit that you failed to provide the value that the startup was expecting. If the only tangible value they receive is “coaching” and pitch preparation, then that should be considered the booby prize but it’s not worth $1K – $6K (probably two – three months of salaries or a mortgage payment) to a fledgling startup trying to raise money — chances are they have (or could have) received lots of this kind of guidance for free… and the next angle group they pitch to is going to make them go through it all again any way. If Keiretsu’s hit rate is really 50%-60% and the investors are doing so well, then

   RE VC’s making “2 & 20″, that model is just as broken and they are going to have to change or die. Still, the problem with their model is that it is unsustainable, NOT that it sucks money out of those who don’t have any to start with. LPs come to the table with money… plenty of money. To the extent that large VC funds are effectively gouging LPs, that’s shitty and LPs should pressure the funds to lower their rates or conform to budgets or some such. But those LPs are in the financial and power position to negotiate with the the VC GPs who are bagging huge salaries regardless of their success. Startups are in no suck situation. Keiretsu is in the “take it or leave” business and they have no risk on the line whatsoever.

   I have no doubts that the Keiretsu management and their angel members are good, smart, down to earth people (I know many of them myself). The problem is that their model capitalizes on the desparation of the least-well off in the fund raising equation, the start ups. I’m not sure Keiretsu could have thrived if it was founded just two or three years earlier when funding was ubiquitous and way too easy to get. But by 2000, all the dried up and so their was a market full of aspiring startups still drunk on the vision that they too could .com their way to riches… if only they could reach investors. Keiretsu was innovative for it’s time but that time is gone. Perhaps it’s time to innovate again?

   Reply
   • Steve

     October 10, 2009 | 9:09 pm

     

     Thanks for stopping by, and making your thoughtful comments, Bob.

     I think what you’re not factoring in here, is that the Keiretsu has 49 full-time employees across the 18 chapters, and it costs $ to do all the administrative work between the monthly meetings, to put in half-day events in first-class venues for 850 people. A package of in-depth information is compiled for each startup company, which is handed out to each attendee (member and guest) at each meeting. During the month, in between meetings there are “deal screening meetings”, scores of diligence conference calls, and many other time-consuming activities to process and manage. The Keiretsu is not a part-time, “best effort” hobby type Angel group. It is very much a full-time, professional operation like a venture capital firm. The VC’s charge DRASTICALLY larger fees (2% *of the ENTIRE FUND, EVERY YEAR!) for their administrative overhead. Why not go after THEM, instead? (now there’s a REAL issue).

     The other think that you don’t seem to realize is that none of the funds invested in the startups flow through the Keiretsu Forum. All of the investments are made by members, directly in the startup companies. So the Keiretsu Forum is not benefitting from the startup’s success.

     Yes, you are correct, by the time the startup that applies to the Keiretsu Forum reaches the half-way point in the roughly, 90-day process, when they present, historically they have a 50-60% chance of receiving funding. Over 220 startups have received almost $250M from Keiretsu Forum members.

     Calacanis has claimed that Keiretsu Forum members are “not really Angels”, “don’t invest”, etc. Nothing could be further from the truth. Each and every Keiretsu Forum member is an accredited investor, and if they don’t invest in at least one or two startups a year, they are asked to leave. Most K4 members are quite a bit more active than that.

     Thank you for recognizing that most Keiretsu Forum members are good, smart, down to earth people. That is the thing about it that makes it such a rewarding activity for me (second only, to helping startups). And our leader, Randy Williams, exemplifies that ethic. Those members have contributed to over 110 Charitable organizations brought in by Randy since the K4 was formed in September 2000.

     Sure, there are other models for “paying the bills” for this large-scale, global investment service organization. I am sure Randy will evolve his business model, in consultation with the membership, as the business climate changes. I understand that is something that is under constant review. But it shouldn’t be done because a self-proclaimed “blogger terrorist” is holding a gun to his head, and spouting lies! Calacanis clearly doesn’t know the first thing about the Keiretsu Forum. I don’t think he’d fit in, anyway – everyone I have met their is a first-class, businesslike, professional, friendly, and well-adjusted successful person. Regardless of the size of your bank account, successful people don’t commit slander, libel, and lie their way to success. There are certainly better ways for TC50 to deal with their competition, don’t you think?

     Thanks again Bob, civil debate and legitimate questioning of how/why the Keiretsu Forum works, are always welcome. I am going to startup posting, over the coming days, weeks, and months, a lot of information directly from K4 members, and funded entrepreneurs to “get the truth out there” about how the money the Keiretsu brings in is used, what benefits the entrepreneur receives, etc. Jason’s “Jihad” is based upon a set of lies! And I am surprised someone of your stature would want to even become associated with it, giving the tone of his nasty little war.

     Best regards,

     -steve b.

     Reply
     • Bob Crimmins

       October 11, 2009 | 2:22 am

       

       Steve, thanks for your response.

       While I don’t fully understand the inner workings of Keiretsu, what I think I have learned thus far is 40%- 50% (huge numbers) of the startups that pay significant fees to Keiretsu get no funding. Contrary to your suggestion, in fact I did take into consideration all the overhead expenses that Keiretsu incurs in order to runs its business and I fully realize that it is a full-time, professional organization. No worries there… it’s good to have professionally run orgs like that around. The issue is how they pay those expenses, i.e., in significant part through extracting big fees from a bunch of startups who get no funding out of the deal. By your own numbers, there have been over 200 startups who paid big money… for no money. That, in my opinion, is a tragedy and not a number to be proud of by any stretch. (Although I suspect the number is much worse because of the parsing of the phrase you used, “by the time the startup that applies to the Keiretsu Forum reaches the half-way point in the roughly, 90-day process, when they present, historically they have a 50-60% chance of receiving funding”. How many paid fees but didn’t make it past the 90-day point or didn’t get to present? Why not just say how many startups that pay fees actually get funded by Keiretsu investors”. That would be much more definitive. Maybe the number you gave really is the number of startups who paid fees and got funded but Keiretsu suffers within the startup community from a perceived lack of transparency and parsed wording like that doesn’t help matters.)

       Regarding “going after” VCs, while it’s true that VCs charge ungodly fees as well (especially the larger funds), they are charging those fees to their LPs, i.e., financially successful individuals… not stuggling startups. LPs are by and large quite well off and are in a position of strength to negotiate with the VCs partners if they so chose, especially in the current financial climate. Not so for startups for whom that $8,000 fee may represent their next five months of mortgage payment and/or the end of their savings. This is why it’s not very attractive to “go after” VCs… their LPs don’t need any advocates.

       Regarding the relevance of whether investment moneys “flow through the Keiretsu Forum”, I don’t see that it matters much. In fact, I believe that Keiretsu’s incentives would be more properly aligned if they did have a stake in the outcome of the startups they represent. As it is, they have no incentive to ensure that every startup they put in front of their cadre of investors has a better chance than a coin flip of getting funded. And, of course, it’s not necessary for the funds to “flow through” the Keiretsu Forum in order for there to be more accountabilty for Keiretsu. For example, Keiretsu could only take fees from startups who actually get funding, i.e., a success fee. They could also be paid partially in cash and partially in equity in the newly funded startup; this happens all the time in the angel world where relationship brokers bring investor and entrepreneurs together and receive their compensation partly in cash and partly in equity.

       Given the transformative financial climate we’re in, I think it’s time for innovators to work out an angel funding process/model that would allow for scaling the screening process for much less money and that would better align the financial incentives of the players. This is being done by groups like Y-Combinator, Tech Stars, Founders Coop, and others. Surely there are other smart, efficient and effective models that have yet to be rolled out. Even just by automating the upstream submission/evaluation process you could eliminate a lot of the expense and still provide for a filter to keep those who either aren’t serious or not ready from sucking up cycles. I agree with Jason et al. that charging the entrepreneurs thousands to pitch is unconscionable; but if you had to charge a nominal, one-time $100 submission/engagement fee I would be fine if it was necessary to further filter those that aren’t serious or ready. But I’m not convinced that’s even necessary. I would support a pay for performance model where the angel aggregator group only gets paid if they are successful in making a good match between their investors and the companies they charge fees to — no funding, no fees. Charging, say, a 2% – 4% success fee is utterly reasonable and in this scenario, the angel group has it’s incentives aligned with the startups and the investors, i.e., to make successful matches between entrepreneurs and investors. Beyond that, give the entrepreneurs good tools to understand what your expectations are of companies that are going to make it through the screening process. The best way to eliminate the “riff raff” is to have stringent requirements for submission and make them work for it. Make them translate their business plan into a standard format that ensures that they have considered all the important factors of market opportunity, competition, product risks, expenses, etc. Give them good examples of each of those elements so that they’ll realize when they really don’t have their act together like they think they do. Those that aren’t ready won’t be able to complete that process and those that do will be easier to screen because all the basic/necessary background will be there and in the right format. Moreover, those that didn’t have the answers got an education on what’s necessary. Record a series of videos that explain each element of the business plan, why it’s important and how to prepare their own. For those that make the first cut, schedule a fifteen-minute conference call or video conference to press on a few of the key points and get a sense of the entrepreneur’s understanding of their product/market/competition and to see how well they think on their feet. Next step… have them video record themselves making their pitch. Give them a simple guide with what to cover, how much time to spend on each bit, etc. Make a recording of a good pitch available to them along with a directors cut with commentary on what was good; similarly with a bad pitch. That’s all self service and if they are serious then they’ll go through the paces. By now, you’ve screened out nearly all the “riff raff” and you can move forward with in-person screenings/critiques of those that passed the video pitch. Also by now, you’ve given value to the entrepreneurs by providing a structured process that they undoubtedly learned a lot from and improved their pitch (and their business plan) and the angle group had to spend very little overhead getting them that value. By this time they also know that the angel group is going to take 3% cut of whatever money they raise for you and the entrepreneurs will be happy to pay it. And by creating this high-quality resource for entrepreneurs, you’ll create the door that entrepreneurs will beat a path to because you’re adding value and not gouging them for the privilege. And thus your deal flow will increase and possibly your hit rate… and investors will like that. Everybody wins!!

       This is, of course, a hackneyed proposal with lots of issues and gaps and such but I just can’t believe that we’re so creatively bankrupt that we can’t figure out a model that aligns incentives toward success for all parties and doesn’t have the unsavory scent of extortion (ok, that’s an overstatement but you get my drift). I’m sure you’re right that Randy “will evolve his business model… as the business climate changes”. The business climate has indeed been changing and I think a fruitful way to view Jason’s remarks are as a kind of canary in the coal mine.

       If angel groups have a successful business model then more power to them. But if defending your model requires a law suit to keep folks from criticizing it then I have to wonder about just how strong the model is. Again, my view is that this current economic climate and the transformative effect it is having on the capital funding markets is an opportunity to build a better mouse trap. Who’ll do it? Can Keiretsu do it? If they can then I bet they’ll win big.

       Sincerely,

       Bob Crimmins

       Reply
6. Steve

   October 11, 2009 | 5:17 am

   

   Bob, thanks again for stopping by and wow, do you post one heck of a good argument!

   I am going to get a good night’s sleep, and then roll up my sleeve to give you an equal-quality reply.

   I do want to make one opening, beginning, minor debating point, if you please.

   Say 400 startups present on month [n], and the K4 funds 55% of them. Isn’t that Darwanism? We don’t fun 100% of startups; otherwise members would quickly become redundant. But this comes down to something more fundamental.

   Randy’s philosophies include as a major tenant, that Collective Intelligence (CI) is a crucial leverage point in evaluating, and valuing extremely complex private equity financing deals. That is the value-add of the Keiretsu Forum.

   Bob, I would like to invite you as our guest of honor at the pending (4th Thu of every month, 0730 AM PST) Keiretsu Forum meeting in San Ramon, CA at the AT&T Headquarters, so that you can see the process in action.

   I would also like to extend an invitation to join the K4 meeting to anyone else that has interest. I would like for some of you who are rationale and smart, to make your own decisions.

   Also, on a seperate topic. I think the idea of Jason’s terrorist organization setting up free-pitch, competing meetings, is beyond terrific. I’d like to volunteer to help, too.

   Let me know how you do with that!

   Bob, I will reply in full tomorrow.

   -steve b.

   Reply
7. Bob Crimmins

   October 21, 2009 | 12:41 pm

   

   Steve,

   Darwinism is fine… the question is which beast is going extinct. Startups will always be around and so will angels. I think it’s an open question whether groups who’s model extracts significant fees from startups without any requirement to achieve results will continue to thrive. Certainly, the startups have to achieve results in order to survive and the market sets the threshold for those results — the market for capital and the market for their product. Similarly, angels have to achieve results with their investments or they are sunk. I don’t know what the success rate ought to be for angel groups… I think it is a complicated question and depends a lot on the specifics of the groups model, the profiles of their angels and the relative size of the fees they charge. At a minimum, I think a group should consider that metric one the most important factors that they need to drive upward and if you’re embarrassed by that number and the startup community is calling you out on it and you’re threatening law suits against folks who talk about it openly… then I think that’s as good an indicator as you need that your model is broken.

   I’m less interested in the hullabaloo about who’s model is worse then others and who’s evil and who’s not then I am about helping Darwin sort it out and identify models that can succeed.

   Thank you for your invitation to attend a Keiretsu meeting. I’m not in the East Bay very often but would welcome the opportunity to hear directly from Randy and others about their thoughts on this.

   Bob

   Reply

1. SKMurphy » Do Not Pay to Pitch Investors

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