On the internet, no one has to know where your company is located. So Rus=
s
Fletcher and his partners figured they would have no problem basing their
Net startup, HealthDirectory.com, in scenic but isolated Missoula, Mont.
''We wanted to live in a place we loved,'' says Fletcher, chief executive=
at
the online publisher of physician directories. But out on the Bitterroot
Range, it's easier to find bighorn sheep than investors--let alone ventur=
e
capitalists. So to raise the $5 million he needs to take his service
worldwide, Fletcher went back on the Web--and located Venture Capital Onl=
ine
(Vcapital. com), a Chicago-based online network. HealthDirectory's busine=
ss
plan, tuned up under Vcapital.com's tutelage, snared the attention of six
firms, whom Fletcher is interviewing to find the best fit for his
enterprise. ''For companies in a remote area like ours, the Internet offe=
rs
an excellent way to at least get in front of investors,'' he says.
The World Wide Web is turning into a Capital Web for entrepreneurs. New
companies are springing up that use the Internet's connective power to li=
nk
idea-rich entrepreneurs with cash-rich investors. The result can be a
streamlined funding process that leapfrogs over the geography-bound perso=
nal
networks of traditional venture finance to form virtual networks that spa=
n
the nation--or the globe. Moving the hunt for capital online doesn't take
the work--or the risks--out of the search. The Net's anonymity means
companies must keep up their guard against funding scams or middlemen who
will publish corporate confidences far and wide. ''The Internet doesn't
change the basic rule: know who you're dealing with,'' says William L.
Walton, CEO of Allied Capital Corp., a Washington-based small-business
lender.
The promise of Web capital is that it will expose an entrepreneur's brigh=
t
ideas to many more potential investors. The details vary, but most online
financiers work like this: A company seeking capital can submit an
electronic form via the financier's Web site. If the prospect's business
seems likely to match investors' interests, the banker will work with the
firm, via phone or in person as well as by E-mail, to refine its business
plan and put it in a format investors like to see. The banker then
distributes the plan, without identifying the company, to investors. If
they're interested, they tell the banker, who introduces them to the
company. The banker might put together a deal, or let the investors and
prospect negotiate directly. The banker takes a cut from the deal's proce=
eds
and, in some cases, also takes a stake in the prospect's stock.
Like other venture capitalists, the best Web financiers demand a lot of w=
ork
from their investment prospects. A finely honed business plan and energet=
ic,
focused management still are crucial to success. And many entrepreneurs h=
ave
learned that the online hit rate isn't necessarily any higher than that o=
f
old-style finance. Caren J. Martineau, for one, feels the winnowing proce=
ss
of online finance took the romance out of her business--literally. Martin=
eau
approached Vcapital.com for a $4 million investment in her firm, Romance
Boutique, an online gift catalog and shopping service for lovers. The
service put her through weeks of eye-opening preparation before it posted
her Web presentation on its site. The pitch drew requests for a full
business plan from more than a dozen venture capitalists--but none follow=
ed
up. Martineau blames the ''dry'' format of an online pitch: ''The process
doesn't let you sell the sizzle of your business,'' she says. ''For a
venture like ours that's based on romance and emotion, that's deadly.'' T=
he
Glen Ridge (N.J.) CEO is now negotiating financing with Orbital Capital, =
a
New York venture firm.
The best new-wave Web financiers try to match a carefully screened portfo=
lio
of companies with a similarly vetted network of high-net-worth individual=
s
and private and corporate venture funders. Take garage.com, based in Palo
Alto, Calif. Founded by computer marketing expert and former Apple Comput=
er
Corp. executive Guy Kawasaki, garage.com has signed up more than 1,000
''accredited'' investors--a Securities & Exchange Commission category tha=
t,
for individuals, requires net worth exceeding $1 million or three years o=
f
family income topping $300,000. These angels congregate in Heaven, a
password-protected Web page where they can view pitches from companies
selected and groomed by garage.com's partners.
And how does a venture get to Heaven? Tripwire Security Systems Inc., a
maker of software to detect tampering with corporate and government
databases, was introduced to garage.com by an investor who had helped CEO=
W.
Wyatt Starnes with seed capital. Garage.com's investment bankers helped
Starnes refine his business plan, which they then posted in Heaven. When
intrigued angels responded, they got an E-mail introduction to Tripwire. =
For
Starnes, the final deal included two pleasant surprises: Tripwire was abl=
e
to raise $2.4 million, up from an initial target of $1.5 million, and its
investors include a major venture capitalist. Six months later, the inves=
tor
and Tripwire are discussing a follow-up round. New players are crowding i=
nto
Web finance. After managing his own company's $2.5 million private stock
placement in November, 1998, CEO Greg Halpern of Circle Group Internet
decided to expand his Web-site development business into investment banki=
ng.
The Mundelein (Ill.) firm has bought a broker-dealer and built a list of
accredited investors out of a database of 324,000 online investors. Circl=
e
Group now has nine private placements in the works--all for clients of it=
s
main Web-authoring business.
Not all Internet financiers are newly hatched. The Capital Network, an
Austin-based nonprofit, has raised more than $50 million in seed funding =
for
2,500 companies since 1989, through a computerized match-up of business
plans with investors' interests. TCN still pitches its 20-plus prospects
each month to investors via snail mail--but most business plans are now
submitted to the network's Web site, and TCN is moving toward Internet an=
d
Webcast presentations for investors. High-tech firms have been quickest t=
o
tap the Internet for capital, but old-economy businesses are getting a
chance, too. OffRoad Capital Corp., with a network of investors spanning =
48
states, plans to do private offerings for operating businesses in any
industry. ''Revenues and profits still matter more than having a
'dot.com,''' says OffRoad CEO Stephen Pelletier. Entrepreneurs also can t=
ap
the Internet even if they would rather work with traditional bankers. Sin=
ce
1995, Direct Stock Market has provided a marketplace for 115 direct publi=
c
offerings, either self-registered by issuers or managed by small
broker-dealers. The Santa Monica (Calif.)-based company's advantage, says
CEO Clay H. Womack, is the low cost of E-mailing prospectuses and putting
road shows online. With so many investment services pitching themselves o=
n
the Web, how can an entrepreneur guard against scams? One clear giveaway =
is
a for-profit banker who demands hefty fees up front from a client.
''Legitimate bankers take their compensation out of the back end, from th=
e
proceeds of the deal,'' says Philip A. Feigin, executive director of the
North American Securities Administrators Assn. That should go double for
venture funders, since their lifeblood is a steady flow of business plans=
to
present to investors.
Another danger sign: services that demand confidential technical or
financial details without signing nondisclosure agreements or stating who
will see the information. Even traditional venture capitalists can leak
business plans to other firms they are involved with--and with a Web-base=
d
investor network, you can't tell who will end up reading your company's
plans. Besides, investors don't need such detail for preliminary screens:
''If you can't explain what you're doing without getting into bits and
bytes, you need to revisit your business plan,'' says TCN Assistant Direc=
tor
Paul L. Myers. Investigate any potential investor or banker just as
thoroughly as you would an investment you're making. When Auren Hoffman w=
as
seeking funds for Bridgepath.com, a San Francisco-based firm that helps
headhunters use the Internet to manage their businesses, he demanded that
would-be financiers provide the names of clients they had funded. ''Most =
of
them just never called me back,'' says Hoffman, Bridgepath.com's presiden=
t.
Hoffman gave up on online financiers after checking references on six fir=
ms
in 1998. Instead, he tapped a traditional angel network to raise $1 milli=
on
plus. But now that he needs a second round of capital, he figures he can
turn the financiers' tools back on them, using the Internet to research
which venture firms--and even which partners--will be most receptive to h=
is
pitch. Even without an Internet banker, the Web can speed the flow of
capital to entrepreneurs who need it.
Tushar J. Mehta
email: [email protected]
voicemail: (206) 405-2335