When CEO Curtis Giesen was looking to raise money for his company,
DrDrew.com, he made the rounds of Silicon Valley venture capitalists. Most
of them liked his idea of building an online health and relationship Website
around Dr. Drew Pinsky, co-host of the hip radio and MTV show Loveline and
Gen X's answer to Dr. Ruth. They figured that in two years the New
York-based startup could be worth $50 million. But that just wasn't big
enough--and they all turned him down. "[The VCs] looked at our year-three
number and said, 'We need to see ten times that,' " Giesen recalls. So last
fall Giesen and Dr. Drew turned to Garage.com, a new Palo Alto outfit that
marries early-stage tech companies with investors. Run by the charismatic
former Apple evangelist Guy Kawasaki, Garage.com canvassed its elite network
of Silicon Valley investors and set up meetings for Giesen. From these
meetings, the company raised a total of $1 million from five investors. Says
a grateful Giesen: "We love being part of the Garage.com mafia. This
wouldn't have happened without them."
Garage.com is part of a new and emerging group of so-called venture
catalysts. Armed with more than just a catchy name, the catalysts help
funnel some of Silicon Valley's venture capital to startups that for various
reasons can't otherwise get their hands on it. Like DrDrew.com, the
startup's market potential may be too small--VCs really want to fund the
next Yahoo. Or the startup may lack experienced executives--VCs have a bias
toward funding people who've done it before. Or perhaps the company is
looking for a paltry several hundred thousand dollars; as VC funds have
gotten larger, anything less than a $3 million investment seems a waste of
time.
Garage.com and the two other most prominent venture catalysts, Interactive
Minds in Pleasanton and Artemis Ventures in Sausalito, work with a
relatively small group of entrepreneurs to find investors, partners, and
customers; hone the business plan; and create a marketing strategy. They
also work as headhunters, finding staff for key positions. "We can go in and
roll up our sleeves much more than they [the VCs] would ever have time to
do," says Randy Haykin of Interactive Minds. "We spend up to six days a
month with our companies, and the average VC spends up to one day a month,"
echoes Christine Comaford of Artemis. The personal service Comaford is
touting comes at a price. When Garage.com brokers a successful round of
financing, it takes up to 5% of a company's equity. Interactive Minds and
Artemis each charge a monthly cash retainer or a percentage of a company's
stock in return for their services. Founded last year by Comaford, an
ebullient former entrepreneur, and her partner, Kimball Wood, Artemis has
worked with four startup clients that have each handed over 3% to 6% of
their stock and roughly $5,000 a month. (In the future, Comaford will invest
through a $20 million venture fund rather than charge the fixed fee.)
Interactive Minds, founded in 1995 by Haykin, a former vice president of
marketing at Yahoo, and Carl Nicholas, a former Booz Allen consultant,
charges different fees depending on its level of involvement. In instances
where Haykin and Nicholas assume interim management roles and spend several
days a week working on-site at a company, they'll charge as much as 3%
equity and $15,000 a month. Interactive Minds also makes small investments
in its eight companies from a $5 million venture fund it manages. These
hybrid approaches to venture investing don't sit too well with some
entrepreneurs, who resent giving up extra equity or cash to get funded. "The
[catalysts] are putting an unnecessary toll on the road to investment," says
Joseph Ansanelli, the 29-year-old co-founder of Connectify. A nascent
startup with no customers or revenue, Connectify, which makes
direct-marketing software for businesses, didn't need venture catalysts.
Working on their own, Ansanelli and his co-founder managed to secure $4
million in funding from Crosspoint Ventures and New Enterprise Associates in
just five weeks. Some traditional venture capitalists also scoff at the
catalysts, saying that Garage.com and its ilk do nothing new. "VCs help
companies brainstorm on strategy, help with recruiting, and give
introductions to business partners. The idea that we're not doing that is a
load of crap," bristles George Zachary, a partner at Mohr Davidow.
But the entrepreneurs who have worked with Garage.com, Interactive Minds,
and Artemis don't seem to mind the fees. Prescott Lee, of eCircles, a
company that hosts Web communities, paid what he calls a modest fee for
Haykin to work at the company for three months as interim vice president of
business development. "It was definitely high value for us," says Lee.
Haykin put together a $1 million round of financing last fall and helped
nurture the company to the point where CMG@Ventures, a traditional VC firm
with headquarters in Boston, is investing $6 million. Similarly, James
Jonassen, CEO of a human resources software developer called PeopleMover,
considers Artemis' work a "huge bargain." Comaford helped PeopleMover secure
a $5 million round of funding this past December.
Whether venture catalysts can turn underdogs into profitable acquisitions or
hit IPOs is still questionable. But given the fees they've managed to
extract from their clients, if their hands-on approach uncovers a few
diamonds in the rough, one thing's for sure: Expect a few more venture
capitalists to call themselves venture catalysts.
Tushar J. Mehta
email: [email protected]
voicemail: (425)558-1101