| BUSINESSWEEK ONLINE : JUNE 21, 1999 ISSUE | ||||||||
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| BUSINESSWEEK INVESTOR
An Internet Heaven For Venture Capital Angels New Web sites offer wealthy investors early access to high tech 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. BY MIKE MCNAMEE _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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