BY Mike McNamee, BUSINESSWEEK ONLINE : JUNE 21, 1999
© Copyright 1999, The McGraw-Hill Companies Inc. All rights reserved.
King Oehmig couldn't help wondering whether he had ''missed the boat on all
this technological stuff in Silicon Valley.'' The Episcopal priest in
Chattanooga, Tenn., and his brother, West, had invested their family's
assets shrewdly in stocks and with private partnerships that took over
ailing industrial companies. But they didn't have a window into the
high-tech world. Then a friend in San Francisco told them about a startup
called OffRoad Capital. After checking out OffRoad's Web site in late April,
King Oehmig called the venture capital firm's founders to discuss their
plans to use the Internet to link companies with investors. Now, the Oehmig
brothers are charter members of OffRoad's virtual investment community,
preparing to see their first deals in an Internet-based ''off-road show.''
The Oehmigs are participating in the latest innovation in online investing.
Since the early '90s, mutual funds, pension funds, and insurers have pushed
all but hyperwealthy individuals out of the venture-capital action. But now,
some venture capitalists have begun exploiting the Internet's connective
power to give merely well-off investors a chance to get in on the ground
floor.
Two firms in the Bay Area, the epicenter of venture-capital action, are
leading the way. Based in Palo Alto, Calif., garage.com uses its Web site
(www.garage.com) to match ''angels''--investors willing to be the first
outsiders to buy into a company--with high-tech and medical-sciences
startups. So far, the 25 companies that six-month-old garage.com has offered
to its roster of angels have raised an average of $2.2 million each.
Individual investors kicked in at least $50,000 apiece. OffRoad
(www.offroadcapital.com) of San Francisco, which plans to post its first
list of candidate companies in early summer, hopes to round up as much as
$10 million per deal for established companies grooming themselves for a
buyout or initial public stock offering. OffRoad's deals will require each
investor to ante up at least $25,000.
With that kind of ante, these Net venture capitalists aren't advertising on
the sides of buses. Investors have learned about them mostly by word of
mouth. Membership is open only to ''accredited'' investors, a Securities &
Exchange Commission category that requires a family's net worth to be more
than $1 million, including the investor's home, or annual joint income to
exceed $300,000 for three consecutive years. Would-be angels also have to
fill out an investor profile. Garage.com insists its angels have operating
or financial expertise in high tech so they can advise the entrepreneurs.
''We promise our clients high-value money, from investors who can bring
coaching as well as cash,'' says Guy Kawasaki, a former Apple Computer
executive who is garage.com's co-founder and CEO.
NEWBIES GET IN FREE. Out of 4,600 business plans submitted to garage.com's
Web site, the firm has picked 25 ''clients,'' startups such as
video-software developer Reality Fusion of Santa Cruz, Calif., which then
get extensive help in polishing their plans and presentations. ''By the time
they post the deal, it's a lot better than the average business plan that
comes in over the transom,'' says Julie Constantin, a Palo Alto angel who
has invested in five of garage.com's deals. The ventures are then listed in
''Heaven,'' which is a password-protected portion of garage.com's Web site
where the angels may gather. Newly registered investors receive a 90-day
free pass to examine deals, after which they'll have to pay $1,000 a year
for access. If an investor spots an appealing plan, garage.com makes an
introduction, often hosting a lunch where entrepreneurs and potential
investors can meet. It's up to the angels to select a lead investor, often a
VC firm, to negotiate a price for the investors' share of the company. They
also must supplement garage.com's screening with additional research. Angels
usually get convertible preferred stock, which can carry benefits such as
antidilution clauses that aren't attached to common shares. Garage.com buys
a 3% to 5% stake in each client company and collects from it 5% of the
capital raised.
WEBCAST PITCHES. This hands-on approach and emphasis on high-tech deals
means that most of garage.com's participants and investments are located
near Silicon Valley. OffRoad, by contrast, has signed up more than 1,000
investors from 48 states to review deals in a variety of industries. As a
result, OffRoad will use the Net to post companies' pitches and enable
investors to chat about prospects. Even when it holds traditional road
shows, OffRoad will Webcast them and then post the transcripts for far-flung
investors to review.
Over the next year, OffRoad hopes to offer investors 20 to 30 deals--all
involving up-and-running companies. ''We're financing companies with
customers, revenues, and maybe even profits--not ventures, which I define as
three guys and a slide show,'' says CEO Stephen Pelletier. Companies also
must have a plan to use their new capital to position themselves for a
buyout or an initial public offering so that OffRoad's members will know
when they can reasonably hope to recover their investment. Charter
investors, who join before OffRoad posts its first deal, can get in free.
Future investors will have to pay $1,000 for the first year of access and
$250 for each subsequent year. OffRoad, like garage.com, also will collect
investment-banking fees from client companies.
While these Net venture-capital firms screen their candidate companies,
investors should recognize that investing in startups and private offerings
requires far more effort--and may involve more risk--than buying even hot
dot.com stocks. VC deals, whether on or off the Net, call for due diligence.
After all, your investment could turn out to be a 10-year partnership--or an
18-month washout. But if tales of Silicon Valley riches have made you eager
to tap in, the Net can bring the opportunities to your desktop.
Where to Start
Venture capital firms such as OffRoad Capital are creating a virtual
investment community. Here's how an investor can participate:
TO START, visit OffRoad's Web site (www.offroadcapital.com) or call 415
796-5000.
APPLY ONLINE by certifying that you meet SEC standards for accredited
investors, setting up a user name and password, and filling out an investor
profile.
PAY $1,000 FEE (waived for charter members who join before the first
potential deals are posted this summer). Now, you can view and download
specifics on the capital-hungry companies.
QUERY execs of candidate companies by E-mail, meet them face to face, or
listen to them via Webcast.
READY TO INVEST? The minimum is $25,000. Send funds to a custodian bank,
which will register and hold purchased shares in your name. You get
quarterly financial reports and can participate in quarterly online forums.
source: OFFROAD CAPITAL
Tushar J. Mehta
email: [email protected]