Three men and a Web idea
By Zina Moukheiber, Forbes, May 17, 1999
=C2=A9 Copyright 1998 Forbes Inc
A VENTURE CAPITALIST stops at Gregory Keough's booth during the Mid-Atlan=
tic
Venture Fair in Philadelphia=E2=80=94an annual meat market for money-hung=
ry
entrepreneurs. He stares at a computer screen, looking stumped. Keough's =
Web
site is in Spanish, and the VC can't read a word. "We're Zona Financiera,=
"
Greg says, rolling his "r" in perfect Spanish. "The on-line financial
services provider to Latin America." The financier sizes him up: 32-year-=
old
Keough is about as Latino-looking as Matt Damon. "How the hell did a grin=
go
like you get involved with a thing like this?" the VC wants to know. Greg
clears his throat and drops a small bombshell: He was an officer in the
Central Intelligence Agency in Latin America during the early 1990s. "I'm
afraid I can't say more," he teases. A line in his r=C3=A9sum=C3=A9 reads
intriguingly: "Acted as contact between the U.S. and rebel forces and
extreme right-wing political factions." Those dangerous liaisons, he clai=
ms,
earned him the agency's highest award, the Intelligence Star. The financi=
er
is curious, but he shakes his head. "Don't know much about those [Latin
American] cultures," he confesses. Greg sighs as the visitor departs, "Th=
is
is harder than I thought."
It's a damp day in mid-November 1998. Greg and his brothers Jonathan,
27, and Timothy, 25, are among 98 entrepreneurs in Philly's convention
center. They're all vying for the eye of potential investors, who mill ab=
out
the booths like traders in a Middle Eastern bazaar. For the Keoughs, it's=
a
stop on a 15-month journey to find startup capital. The idea is to offer =
a
place where Spanish- and Portuguese-speaking denizens of the Net=E2=80=94=
10 million
and counting=E2=80=94can comparison-shop for a mortgage, a car loan or in=
surance, as
well as check stock quotes and financial news. Latin America's total loan
volume outstanding, Keough claims, is more than $1 trillion, none of it
transacted on-line. (In the U.S. less than 1% of loans are done that way.=
)
Keough aims to collect a flat fee of $10 on loan leads to banks, and a 0.=
25%
cut if the borrower applies on-line. To participate, banks like BankBosto=
n
(Zona's only customer so far) pay a $5,000 fee per country. Keough is
nearly hoarse from reciting his spiel to mildly interested passersby. It'=
s
the siren song of every entrepreneur in need of cash: confident, upbeat,
masking desperation. The money hunt is an exhausting test of persuasion a=
nd
raw staying power. Keough is looking for $1 million, mainly to attract
management. "How the hell did a gringo like you get involved with a thing
like this?" asks a venture capitalist. He has already hit a wall. Before
Zona, Greg and his brothers sank $200,000 of their savings into a
loan-quoting engine for U.S. home buyers. But they were slow to forge tie=
s
with portals to promote their Loan Locator and got bumped by Intuit, whic=
h
shelled out $30 million in part to be America Online's loan channel. "You
can have a Web site that turns lead into gold," muses Keough. "But if peo=
ple
don't know you're there, you're out of business."
Not a total loss: The Keoughs ended up licensing the loan-quoting technol=
ogy
for $600,000 to a couple of financial services firms, and plowed two-thir=
ds
of the proceeds into Zona in December 1997. Jonathan (who managed AOL
Canada's Web site) and Tim (who helped develop Intuit's site) created the
technology. They set up shop in the tight storage room of their parents'
home in Potomac, Md. and hooked up a T-1 line.
But just try to interest a venture capitalist. "Come back when you get
financing," one investor told Keough. Just the day before the fair, they'=
d
driven 13 hours from Charleston, S.C., where Keough gave a presentation t=
o a
group of uninspired VCs.
Now he has to do it all over again in front of a hundred potential invest=
ors
busy digesting a three-course lunch. Behind him, in big letters,
"Financiera" is misspelled. Keough ignores it and cracks a joke: "Getting
money from this crowd would be like getting an award from the CIA." A few
titters. Keough effortlessly rattles off his pitch, coming in at seven
minutes=E2=80=94three minutes less than his allotted time. The audience a=
ppreciates
brevity; it has to listen to 49 other presenters.
Afterward Michael Faber approaches Keough. "What impresses me is when an
entrepreneur speaks clearly and passionately," he says. Faber manages a $=
10
million fund in Washington, D.C. that invests in Internet start-ups. He
hands Keough his business card. Discreetly, Keough scribbles an "8" on th=
e
back. It's his rating system for gauging the level of investor interest o=
n a
scale of 0 to 10. "Nobody's going to remember who said what at the end of
the day," he says, his blue eyes showing fatigue.
It's 5:30, time for his appointment with Karen Griffith Gryga, a partner
with Philadelphia-based Liberty Advisors. Arriving ten minutes late,
Griffith Gryga creates a small sensation when she shows up at Zona's
booth=E2=80=94long, platinum blonde hair cascading over the faux leopard =
fur collar
of her dress, diamond studs the size of peas poking through her ears. Zon=
a
caught the eye of the 33-year-old venture capitalist at a similar venture
fair in Virginia last September.
"Come back when you get financing," one potential investor tells Keough.
"I'm guilty," she confesses, settling into a chair. "I read your business
plan. So, what's your lesson with the Loan Locator?" Distribution deals a=
re
key, Keough answers quickly. It's also important to be first. Amazon, for
instance, was successful because it got in when Internet real estate was
cheap. Zona has that opportunity now in Latin America, land of 500 millio=
n
potentially wired souls, where the Internet landscape is still virgin. "O=
nly
2% of all Web sites are in Spanish or Portuguese," he notes.
"The big kicker is going to be StarMedia," Keough says, referring to the
portal that's shaping up as the Yahoo of Latin America. StarMedia has rai=
sed
a total of $80 million in private placement funding. Zona just inked a de=
al
to be the provider of financial news, real estate listings and loan rates=
on
StarMedia's money page. Greg plays the relationship to the hilt.
But Griffith Gryga isn't biting. Keough never hears from her again. "You
have to understand what's going on in these countries, and I don't," she
later explains.
Mike Faber, who rated an "8" on the business card, calls the next day. So
does Stephen Walker, an investor from Glenwood, Md., whom Greg met in
October. Walker sold his network security company to Network Associates, =
and
is now looking to play angel. "I wasn't sure what [Zona] was all about, b=
ut
Greg sounded so good at what he was doing, and he was creating something
that nobody had done before," recalls Walker. "I thought, 'Let's throw so=
me
money at these guys.'"
Meantime, Keough is trying to add luster to Zona by getting former vice
presidential contender Jack Kemp to chair its advisory board. Keough
approaches a family friend who knows Kemp, and can put in a good word.
At their first meeting in Kemp's downtown D.C. office, an excited Keough
expounds on his plans to partner with local media powerhouses. He points =
out
that Chile's La Tercera and Venezuela's El Universal are already providin=
g
local financial news. Kemp listens intently. He speaks a smattering of
Spanish (his mother taught the language in Los Angeles) and, as an early
supporter of NAFTA, knows Latin America well. He's also friendly with
Argentina's former Finance Minister Domingo Cavallo and Pedro Aspe, forme=
r
finance minister of Mexico. Kemp, who sits on the boards of Oracle and
Proxicom, a Web-site design company, is especially impressed with Keough.
"He's a go-getter," he says.
Two offers to buy Zona take Keough completely by surprise. Should he sell
out or hang on?
But in early December two offers to buy Zona take Keough by surprise. Por=
tal
companies he won't name are dangling between $4 million and $8 million. I=
t's
tempting. Should he sell out? Keough pays a call on Walker, looking for
advice. "Steve, you started out in a basement like us, what would you do?=
"
he implores. "My advice is either focus on growing the company=E2=80=94or=
selling
it, but don't dilly-dally," replies Walker, who's still thinking of
investing, but doesn't want Keough to take his money just to tide him ove=
r
until he sells.
Thoroughly conflicted, Keough stalls for a month, wondering what to do. T=
hen
it hits him: "Heck, if those people are interested in us, and think we're
worth that much now, we must be doing something right." Why sell out for
less now when there was a good chance to get a lot more money down the ro=
ad?
By Christmas things start to come together. Walker and Faber eventually c=
hip
in a total of $350,000=E2=80=94and Walker provides entr=C3=A9e to Capital=
Investors, a
blue-ribbon group of angels in Washington, D.C. that includes AOL's Steph=
en
Case, John Sidgmore, vice chairman of MCI WorldCom, and William Melton,
chief executive of Cybercash. Each has thrown at least $100,000 into a po=
t
for seed investments. Keough will make his case before the club on Jan. 1=
1.
That night he gets behind the wheel of his blue BMW 318is. "Guys, don't
forget to bring business cards!" Greg hollers to Jonathan and Tim, slippi=
ng
in a tape of Ricardo Arjona, the Guatemalan Springsteen. After a quick
supper at a tapas bar, they head to D.C. Coast, a swank downtown restaura=
nt.
There, Walker ushers them into a private dining room downstairs, where 12
members of Capital Investors are still polishing off their chocolate cake
and cr=C3=A8me br=C3=BBl=C3=A9e. Dressed in khakis and blue, button-down =
shirts, the
Keoughs take a seat. If Greg is nervous, he doesn't show it as he begins =
a
20-minute presentation.
After only a couple of minutes, the questions start coming. "What's the
status of ISPs?" asks John Burton, former chief executive of Legent Corp.=
, a
data software company that's now part of Computer Associates. Phone servi=
ce
is often more expensive in Latin America, but Keough parries, "The good n=
ews
is that people who want to monitor their finances have money."
"[Gustavo] Cisneros has some pretty strong views about dominating the
Internet in Latin America," says veteran angel David Gladstone. "Where do
you think you'll end up?"
Keough ends up $350,000 shy of his goal. Now, he's got to find an additio=
nal
$7 million.
"It's the best company to partner with," replies Keough, without mentioni=
ng
he's had talks with the Venezuelan media mogul's company. That's because
he's gotten nowhere yet. He quickly continues: "The great advantage is th=
at
companies like Yahoo and AOL don't want to build from scratch. We can go =
and
say, 'Hey, do you want a turnkey solution to a really good finance channe=
l?'
"We're ultraparanoid," he concludes. "We want to move as quickly as possi=
ble
to build this thing up. We have a good opportunity to control on-line
finance in Latin America."
After the brothers leave, the angels decide to put in $500,000, in return
for one-quarter of Zona.
"Hey, heard it went pretty well," says Kemp in a phone call the next day.
But Keough isn't happy. Capital Investors' offer values his company at a
paltry $2 million. Counters Jeffrey Tonkel, president of Capital Investor=
s,
"You had three brothers in a basement with a T-1 line who'd made some
progress in making contacts=E2=80=94how do you value that?"
Over the phone two weeks later, Keough offers Tonkel the terms of a
convertible note=E2=80=94a $500,000 loan with an option to convert at a d=
iscount at
the next round of funding. He wants Zona valued at no less than $5 millio=
n.
The haggling goes on for more than a month. Tonkel hates convertibles. "I=
t's
an awful, awful security," he says. "What it really does is drive up the
valuation for the early investors."
In March he finally agrees to Keough's demands, but caps Zona's valuation=
at
$3.5 million. He offers $300,000 for notes convertible at 50% of the next
financing, giving Capital, Walker and Faber a total 18.5% stake in Zona.
Keough is $350,000 shy of his original goal of $1 million. But he now has=
a
team of heavy hitters=E2=80=94and has gotten over the first big hump. The=
brothers
finally move into an office in Falls Church, Va., in the heart of a Latin
American neighborhood. In April Keough signs on with Microsoft to provide
financial news for MSN Latin America, and is discussing deals with potent=
ial
bank sponsors, including Citigroup.
Now for the tough part. Greg has spent the past several weeks on the road=
,
opening offices in Mexico City, Buenos Aires, Santiago, Bogot=C3=A1 and S=
=C3=A3o
Paulo, and hiring country managers to beef up Zona's content=E2=80=94and =
to sign up
more sponsors. Now he has to hit the VC circuit once again for a second
round of financing. This time he's hoping to raise $7 million. If Wall
Street's infatuation with the Web continues, he can get it. But it might
end. One day in mid-April Amazon was off 31 points. Most executives just
have to worry about the competition. The Keoughs also have to worry about
whether they can get desperately needed capital before the bottom falls o=
ut.
Tushar J. Mehta
email: [email protected]