Is It Appropriate For VCs to Charge a Due Diligence Fee?

Fred Wilson has a good answer up to a question that was posed to him the other day about VCs and fees.

Our startup company recently started seeking funding and the first firm we presented to has shown some interest. However, they have now sent us a Due Diligence Agreement and are requesting a “one time good faith due diligence payment of $9,000”.  Is it standard industry practice to charge the entrepreneur a fee for the due diligence? We are obviously short on cash – paying $9k to every VC who shows an interest in us sounds counterproductive.

The short answer is “no.”  Fred’s longer answer is great and the first comment nails it.

  • Dave Jilk

    Interestingly enough, though, this isn’t that different than what some angel groups do: charge a fee to allow you to present. Although these situations are legitimate, they’re probably not a great deal for the entrepreneur.

  • Yup – and it’s a hideous practice. In additional, some angel groups charge a deal fee in cash as a percentage of a financing that they help with.

    Both of these miss the fundamental point of what an “angel investor” should be providing to an early stage entrepreneur – and what an early stage company should be willing to pay.

  • correct brad – and while we are at it – its also not appropriate for bankers / finders to charge a fee on series A. Creates turbulence at a time the company needs jetstream

  • I wonder if this is a sign that some VCs are getting a little spoiled with the increased dealflow that the whole 2.0 thing has brought on.

    With regard to angel groups that charge, I couldn’t agree with you more. I’ve heard that the founders of Gathering of Angels, a nationwide group that charges entrepreneurs to pitch, make a handsome living off of the money they make off of entrepreneurs. Some angels charge nominal fees — $100-$150 — to cover some costs, but when people start making their livings by charging entrepreneurs to pitch, that’s crossing the line.

  • The real question is: Do you want to make money with fees or get the best pitches possible. While a few hundred dollars will weed out some people, remember some entrepreneurs are already cynical about investors and this kind of practice just adds fuel to the fire.

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