Angel Investors Charging Fees to Entrepreneurs

This argument has been ongoing for sometime, but I thought I would put my two cents in.  The practice of angel investor groups – organized groups of wealthy individuals who want to invest in startups – of charging entrepreneurs presentation fees shows a fundamental misunderstanding of entrepreneurship and cannot possibly lead to the best outcome for investors or startups.  Two groups I have interacted with are among the worst abusers – Keiretsu Forum and Maverick Angels.

Keiretsu Forum is well-known and back in 2009 I was invited by a friend to attend one of their meetings near Menlo Park, CA.  I was excited by the opportunity to see the pitches and to network with the members of this lauded investment group.  I was a little disappointed to find that the quality of the companies presenting was pretty low, and most of the “investors” are attorneys and accountants that are there not there to invest but to pitch their services to the entrepreneurs in attendance.  After exchanging lots of business cards I was inundated with calls from people wanting to help me craft my investment documents or do my taxes.   Still, the statistics published on their website for the percentage of presenting companies that get funded was impressive, so I thought it could not hurt to pitch, so I began the application process.  I was shocked to learn that it would cost me $1500 to present.  Not only that, but I would be required to present to all three of their Bay Area chapters in Oakland, San Francisco and Silicon Valley and I would have to pay the fee for all three!  That’s $4500 just to present!  I had already been invited to pitch many other investors who are both more prestigious and free.  Why would I pay to pitch to this angel group? I swiftly declined.

I also applied to present to Maverick Angels, a Los Angeles based group.  They not only wanted a $1000 presentation fee, but they wanted $400 for me to attend a lecture given by them to learn how to do an investor presentation.  I informed them that a) I have already given very many of these presentations, b) I have an MBA in entrepreneurship from Babson where I got extensive training in this area and c) I lived in Reno at the time and flying to LA just to listen to this lecture seemed unreasonable.  They told me that they require all entrepreneurs, regardless of experience, to undergo this “training” and if I could not travel to LA for it, I could watch their online video and this convenience would still only cost me $400!

I strongly objected to both groups and both of them informed me that their members’ time is extremely valuable and I should be willing to pay for that.  This shows a fundamental misunderstanding of the mutual value that must be shared between a potential investor and a potential investment.  It demonstrates their disdain for the value that the entrepreneur brings to the table.  The presence of an investor at a pitch meeting is valuable, but the presence of the entrepreneur is just as valuable.  If this mutual value leads to investment, it should lead to a win-win arrangement where both parties gain.  If one party cannot see the value in the other before the meeting, then the meeting simply should not happen.

Another argument they use is they need to cover their meeting expenses – which consist of a room donated for free by one of their members, bad coffee and bagels.  They also claim they need to charge to cover the salaries of their staff who ensure that the members do not actually have to do anything themselves.  Three arguments here:  First, the investors are the ones with the money that need an opportunity.  The entrepreneurs are the ones with the opportunity that need money.  If there are any minimal expenses to be born, they should be born by the ones with the money.  Second, often the entrepreneurs have their own expenses just to prepare for and travel to the meeting.  Why do these expenses not count?  Third, if the investments they make do not return enough money as to make these expenses non-material, then they should find a different hobby.

These groups are closer to scam artists than investors.  They have no real understanding of the entrepreneurial process or what it takes to make a startup successful and I believe most are in it just because they think it is glamorous to be able to call themselves angel investors at cocktail parties.  Stay away!

My Dream: A CCI powered LMP1 car at Le Mans

Being an engineer and a gear-head, I love motor racing.  And there is no better combination between engineering, racing and just plain cool factor than the 24 Hours of Le Mans.  You have incredibly diverse and fast cars racing on a crowded track continuously for 24 hours with two drivers hot-seating.  What better way is there for an engineer to demonstrate the performance and reliability of his/her creation?  It’s also a race where fuel efficiency counts for a lot.  Audi took advantage of these characteristics when they decided to enter a diesel race car in the 2006 Le Mans series, taking checkered flags in the 12 Hours of Sebring and the 24 Hours of Le Mans.  Diesels have been dominant in the series ever since (and the popularity of Audi TDI engines has been growing globally).

The newest Audi R18 TDI Le Mans car - A car Darth Vader would be proud of.

I can’t help but think that the CCI engine would outperform even the Audi and Peugeot diesels.  You can get 30% more laps out of a tank of fuel AND you will be lighter.  The only thing I can think of that would not be as good from a racing perspective is that it would not be as loud, and all true racing fans love the thrill you feel in your stomach at the sound of a high-revving un-muffled racing engine.

The rules of the LMP1 category allow for low (or no) production diesel engines and I think might be the only major race category in the world where we would be able to showcase the CCI engine.  Anyone out there want to help fund a CCI engine development project for a Le Mans bid?

Startup Car Companies and the Bloated Expectations

A VentureWire article today discusses the most recent troubles of series-hybrid car maker Fisker Automotive.  I think the story of electric car companies like Fisker and Tesla is a good example of the kind of irrational favor that is given to certain sectors (and more specifically, certain companies) by both private investors and government alike.  Fisker is not as well known as Tesla, which is run by PayPal founder Elon Musk, but it has certainly received a tremendous amount of attention from venture capitalists and the US Department of Energy.  They have raised $850 million from private investors, received approval for $529 million in government loans for their $102,000 Karma hybrid car and $359 million for their second generation vehicle the Nina.  That’s $1.7 billion for a company that is currently able to manufacture 20 to 25 cars per week and hopes to be able to produce “thousands” of cars over the next few years but less than the 15,000 per year that they had previously projected for this year.  Private investors continue to pour in hundreds of millions of dollars.

To justify investing this amount of money in a company – starting at the early development stage to the now very early revenue stage – they must expect that this company will eventually be worth well over $10 billion and be a major global auto OEM.  From 2008 to December 2011 Tesla manufactured 2,100 cars.  Tesla is a public company with a market cap similar to Peugeot-Citroen who manufactured 3.6 million cars in 2010.  How do these expectations and valuations make sense?

I can only think that investors got caught up in an emotional wave that said electric cars are going to take over the world.  Because this was “collective wisdom” they did not have to do any real thinking themselves.  This made it easy for them to gloss over the difficult questions with phrases like, “costs will come down with volume” and confidently stating that someone will solve all their battery, power grid, recycling and other problems in the very near future, without really having any good idea of who will do these things or how they will be done.  It’s also why hybrid car manufacturers have stopped using the phrase hybrid and started calling them “electric cars with a range extender” or “electric car” for short.  Clever.

Can hybrid and/or electric cars find success in this world?  Certainly some.  Perhaps a lot.  The level of success is yet to be determined.  What is certain is that plowing billions of dollars into these companies in hopes that it will force an immediate global takeover was ill-advised.

Cost of CCI Burning Natural Gas

I decided to do a comparison of the cost of fuel for running a CCI engine on natural gas to a conventional diesel and to conventional natural gas engines.  The results were:

  • Diesel Engine: $0.18 per horsepower-hour
  • Conventional Natural Gas Engine: $0.14 per horsepower-hour
  • CCI on Natural Gas: $0.07 per horsepower-hour.

This means that the CCI’s operating cost is HALF that of conventional natural gas engines that are gaining popularity because of their cost benefit with regards to diesel.  This is because of the very low cost of natural gas.  Here are the assumptions used in the calculation:

  • LNG Price At The Pump: $1.89 DGE (Diesel Gallon Equivalent)
  • Diesel Price: $3.85
  • LNG Energy Density: 53 MJ/kg
  • Diesel Energy Density: 45 MJ/kg
  • Diesel Engine BSFC: 205 g/kWHr
  • Natural Gas Engine BSFC: 201 g/bhpHr*
  • CCI BSFC on diesel: 165 g/kWHr

This is where things get a little complicated.  I converted all BSFC numbers to gallons of diesel (equivalent) per horsepower-hour so that I could use diesel and DGE prices to compute $/hpHr.

How is this incredible performance possible?  Most natural gas engines are Otto cycle engines that use low (11:1) compression ratios and spark ignition, causing their efficiency to be pretty low compared to diesel engines.  They are less expensive to operate than diesels because natural gas is so cheap due to the massive production going on in the US.  Another benefit is that there are significantly lower emissions using natural gas compared to diesel.  The CCI engine is able to burn natural gas as a compression ignition fuel, something that no other engine I am aware of can do.  This is because we can go way beyond the typical CI engine compression ratio of 18:1.  We go all the way to 43:1.  If you try to burn natural gas in a conventional diesel, the ignition is delayed so long that the fuel ignites 180 degrees of crank rotation after top dead center.  Obviously, this is no good.  At very high compression ratios, and utilizing the comparatively long time the CCI piston spends near top dead center, ignition delay shortens and we can ignite the fuel in less than 2 degrees of crank rotation.  So we can burn the cheaper fuel with an engine that is not only more efficient than natural gas engines, but more efficient even than diesel engines.

What does all this mean?

Well, it means that if our primary concern is operating cost, that the CCI is even more competitive than than we thought.  It makes the engine extremely attractive in markets like power generation where gas turbines or piston engines are currently used.  The added efficiency combined with the massively lower equipment costs compared to gas turbines make this a real winner.  It makes natural gas much more attractive for the trucking market which has a tough time choking down the $30k more they must spend per truck to get an incremental fuel cost benefit.  Boone Pickens and Navistar recently announced a deal to manufacture natural gas trucks and roll out more fueling stations.  It also makes the CCI engine very attractive as a standby home generator where it can be hooked up to the gas utility lines for fuel, or even as a primary power generator as part of a distributed grid-connected power generation system.

*Natural Gas Engine BSFC data from Kamel, “Development of a Cummins ISL Natural Gas Engine at 1.4 g/bhp-hr NOx + NMHC Using PLUS Technology”, National Renewable Energy Laboratory, 2005

New Website, New Parts

You may have figured out that we went through a major website redesign.  Given that we need every penny for the engine, website design and coding was left to me.  I have to say I’m pretty pleased with how it turned out, despite my initial confusion with trying to figure out DreamWeaver.  Last time I tried to code anything in HTML was 1997.  Also, the blog has been transferred here to WordPress, which I think is a much better platform.

Our last testing round led us to developing lots of new IP that strengthens our position and we have some new parts in process right now.  Can’t wait to put up some new videos in the coming months!