Venture Fund Uses Lottery Model

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BOSTON (TheStreet) -- At first blush, the business model of new investment firm Revolutionary Angels appears like a lottery. All it takes is $5,000 and a dream.

Based in the innovation hotbed of Cambridge, Mass., the firm, launched last month, has a pay-to-play plan that works like this: As many as 100 startups each pay $5,000 to compete for a maximum $250,000 initial round of funding. The runner-up gets $50,000. The rest get feedback.

"This does not seem kosher," says Emily Mendell, vice president of the National Venture Capital Association, in an e-mail message, upon hearing about the firm. "Real angels would never do this."

Founder and Chief Executive Officer Chris Hurley says Revolutionary Angels offers novice entrepreneurs a shot at financing as well as advisory services at a time when they're hard-pressed to find funding through traditional routes.

"If you're a first-time entrepreneur or an early-stage company, there are a lot of challenges to get investments," says Hurley, who previously worked in corporate development at Sun Microsystems. "You can spend a lot of time chasing your tail, and with an early-stage company, time is money."

No argument there. For starters, even bank loans are hard to come by, thanks, in part, to the downfall of CIT Group. And while total venture funding increased 17% to $4.8 billion in the third quarter from a year earlier, first-time financing fell 20% to $633 million, according to the quarterly MoneyTree Report from PricewaterhouseCoopers and the NVCA. That's the least amount for first-time deals in the survey's history.

"What we really want to see are people we've made money with before or co-invested with before," says Michael Greeley, a founder and general partner at Flybridge Capital Partners in Boston and chairman of the New England Venture Capital Association.

Meanwhile, angel investors -- rich individuals who provide capital for needy companies -- have doled out less in the seed and startup stages, according to the Center for Venture Research at the University of New Hampshire. Only 27% of angel investments went to companies in the newbie stage in the first half of 2009, compared with 46% in the same period a year earlier, when the world was more risk-prone.

"At least lately, investors are looking for entrepreneurs that already have some product or a customer," Hurley says.

Revolutionary Angels, on the other hand, can afford to seek out companies that don't yet have anything more than a business plan and a dream. The financial risk -- $5,000 -- lies with the applicants. He notes, though, that he isn't taking a salary. "If we do reach 100 companies, what we'll do with the remaining funding is build out our support infrastructure to continue to offer this program."

Every company that applies for funding will receive written feedback on the business plan, he adds, along with connections to and discounted services from the firm's business partners, which include the BizSpark program from Microsoft, email marketing tool company Constant Contact, as well as local accounting and law firms.

Hurley says entrepreneurs pay a fee of $18,500 to participate in DEMO, the semi-annual highly publicized pitch-fest that has launched companies such as Palm, Symantec, Salesforce.com, Tivo and E-Trade.

"I wouldn't push the analogy too hard," says Flybridge's Greeley. "With DEMO you're getting in front of a couple hundred investors and media. What Chris is offering is advice, guidance and the chance to see one set of investors, which is him."

-- Reported by Carmen Nobel in Boston.