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SMART ANSWERS
By Karen E. Klein
FEBRUARY 10, 2000


Venturing into the Venture-Capital World: A Road Map

Find angel investors first. Know your spiel cold. Don't forget to ask for money

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Q:  I want to take my local art brokerage online and need about $1 million. One of my clients is willing to put up $250,000. How should I prepare for an initial meeting with venture-capital investors?
—E.N.

A:  Experts say that at this stage, you should approach angel investors, not venture-capital firms. Angels are private individuals who invest their own money, mainly in startups. VCs generally invest pools of institutional money. "Venture capitalists seek investments that require in excess of $5 million and sometimes $10 million. They simply cannot justify the management costs in smaller investments," says Lori King, CEO of rainmaker@nvst.com, a financing consultant based in Bellevue, Wash. "Angel investors make individual investments of $25,000 or more each and will often invest in earlier stage companies that only need $1 million to $5 million." Don't be discouraged. You have a "lead angel" — the much-sought-after first investor. That's a great start.

Once that first investor signs on, others will find it easier to follow suit. The fact that your lead angel is a client lends credibility to your capital-raising. From here, see if you can raise enough additional money from other clients or from contacts of your first investor to take your concept to the Web. "If one client is willing to back you, why not go to other clients and make strategic alliances? With these groups you invariably get better valuations and more value-added, and there is less intensive and time-sapping due diligence," says Peter Cowen, a strategic planner and investment banker whose firm, Peter Cowen & Associates, is based in Westwood, Calif. If you can get started this way, you'll be in a better position for your next round of capital-raising — which you'll likely start in about six months, Cowen says.

Before you present your business plan to investors — whether clients or professional angels — be sure that they qualify as accredited investors as required by Securities & Exchange Commission rules. They must have incomes of more than $200,000 and $1 million in assets, not including their residence, King says. When you meet with potential investors, plan a 30-minute presentation, followed by a discussion. Rehearse your presentation with friends and colleagues first. Tell investors how your online venture will make money, how they will be repaid, and about the qualifications of the management team. Expect a grilling. Since you're asking them to take considerable risk, they'll also demand a very high return on their investment. Obvious as it may sound, ask expressly for the money. "Angel investors have commented that entrepreneurs typically don't follow up and don't ask for the money," King says.


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