Where do you meet a hot startup artist? Or a rich benefactor for your indoor fish farm? Try the Small Business Administration's ACE-Net (Angel Capital Electronic Network), a blind, Internet-based matching service that helps wealthy private investors, so-called "angels," find startups with stakes of $250,000 to $5 million to sell.

As befits an Internet matching service, some of its aspirants sound a bit offbeat, including a video production company that does "infomercials" for the Chinese market and a maker of ultrarapid ear thermometers. But ACE-Net is trying to fill a perennial hole in the financing net -- companies that have outgrown the generosity of sympathetic friends and even rich uncles but aren't able to attract venture capital firms, which fund just 1% to 4% of the deals that cross their transoms, according to SBA data.

Of the 350,000 U.S. companies the SBA estimates are high-achieving "rapid-growers," less than 5,000 have any funding from venture firms or corporate benefactors, says Terry Bibbens, the "Entrepreneur in Residence" who directs ACE-Net (https://ace-net.sr.unh.edu/). "It's easy for entrepreneurs to raise up to $250,000 from friends, family, and associates," says Bibbens. "But we found that going beyond that -- to reach people you don't really know -- was the real barrier to access to capital."

GET TOGETHER. It's all the harder because entrepreneurs aren't usually hanging around at the country-club pro shop or other places where individuals worth over $1 million tend to gather. By SBA reckoning, that group pumps $20 billion into more than 30,000 ventures each year.

To get the two sides together, the SBA has mounted a sort of cross between a blind-dating service and an initial public offering. Companies generally pay $495 to post an abbreviated stock prospectus (called a Small Corporate Offering Registration) to ACE-Net's Web site. There, the angels, who must certify their net worth just to eye such high-risk investments, peruse the opportunities from the privacy of their personal computers. The list isn't available to the general public to avoid falling afoul of U.S. Securities & Exchange Commission laws guarding against the sale of high-risk securities to unsophisticated investors.

The odds on ACE-Net, which has been up and running since October, 1996, sound pretty attractive for entrepreneurs. There are some 60 companies and some 600 investors. But a thicket of securities regulations makes it tough to tell if it actually works. "The investors are cautiously enthusiastic," insists Bibbens.

But there's no telling just how enthusiastic: The SEC prohibits ACE-Net directors from speaking about any deals completed through the service or even saying if any have been done. ACE-Net entrepreneurs and the business-development executives advising them say it seems like a great innovation, but few know of any angels who've actually funded a company through it.

PAPER-HEAVY. Some ACE-Net organizers, like David Day, who advises prospective ACE-Net enrollees through Kansas Technology Enterprise Corp. (KTEC) in Topeka, say it will just take more marketing to get the good word out about ACE-Net. "There are still things that need to be worked out," Day says. Arguably, though, it will be hard to market successes without being able to talk about them.

So, what's an entrepreneur got to lose by just signing on? Well, time, for one, and money. The paper-heavy ACE-Net process is no lark. After the sign-up fee come lawyers' fees that, according to Bibbens, average $5,000 but can sometimes run up to $10,000 to help with the forms. Moreover, there's no guarantee anything will come of it. Of course, that's true with a bank-loan application, but at least you can call the bank for an answer. ACE-Netters have to wait for the phone to ring.

The 50-question SCOR "is the biggest form we've ever filled out," says Scott Redmond, a San Francisco entrepreneur who hopes to secure $5 million for building Unifree, a mechanism for automating tasks on the Internet. The SCOR form is mandatory for an ACE-Net listing because technically, companies are offering their stock and must meet certain SEC and state securities commission filing requirements. Redmond has fielded some 24 inquiries since he first registered with ACE-Net in May and is "in talks" with five potential investors. So far, only one has invested -- $5,000.

DAUNTING. A SCOR is much like a conventional prospectus: It discloses risk factors, earnings, financial projections, and how the share-sale proceeds will be used. A public offering is no piece of cake for established corporations, and for early-stage entrepreneurs, it's a daunting experience, say those who've tried it.

"It's really laborious," says Stephen A. Menke, president of Mobil Care Inc. a Lawrence (Kan.) company that's seeking $1 million via ACE-Net to expand production of its prefabricated nursing-home units. Since he listed last summer, he has spent $5,000 in legal bills and still has had no direct inquiries from ACE-Net angels. He blames the investor warnings that litter the prospectus. "First you tell all the risk factors, then you tell about the dream. But if first you tell them why it won't work, you're fearful they'll become disenchanted before they hear the dream," Menke says.

For Bibbens and other securities regulators, however, the laborious disclosure process is what makes ACE-Net better for buyers and sellers than other Internet business-for-sale sites. Scamsters and just plain immature companies don't even bother. "It has turned people off," concedes Bibbens. "However, [they] are often those who don't understand the securities laws of the state in which they operate."

The SCOR form also forces registrants to articulate the specifics of their business plans, something that overeager entrepreneurs tend to neglect. ACE-Net enrollees interviewed by Frontier Online say they came to appreciate it. "It helped us get together the paperwork that would answer any investor questions," says Unifree's Redmond. "If someone wanted to discuss terms, they can read your filing and see what the underpinnings are."

"SHORT FORMS." But that brand of discipline has impeded ACE-Net's growth. When the service failed to attract more than a handful of companies during its early trial phase in 1997, the service streamlined the registration process. Now a four-page SCOR "short form" is available to companies in 27 selected states. Under the short form, companies provide a thumbnail business plan, which permits them to raise up to $1 million. Eighty-five percent of the ACE-Net registrants use the short form, which Bibbens says can be completed within a week.

Some entrepreneurs' advisers, however, are wary of the short form. They contend that it doesn't tell investors what they need to make their decisions. "For someone investing from a distance, the short form just doesn't do it," says Mark Clevey, who assists ACE-Net enrollees at MERRA, a Michigan business development agency. "It doesn't describe the risks properly."

The danger is that ACE-Net could become a bland bulletin board, full of four-page business plans, none of which are sophisticated enough to catch an investor's attention. To guard against that, Bibbens encourages any company using the short form to attach a complete business plan to the electronic documents. That's especially so because entrepreneurs may want other people's money, but they are extremely wary of revealing too much about their businesses. That's not misplaced, says Alexander Glass, director of the Bay Area Regional Technology Alliance in Fremont, Calif. "There's an art of disclosure: Assume your principal competitor has signed on to ACE-Net as an investor, and act accordingly."

To help educate entrepreneurs on the whole process, the SBA has set up 21 "regional operators" around the country, most of which are public/private partnerships for encouraging business development. Companies interact with the system through the regional operators, who issue passwords, advise on registration, and check paperwork for errors. Some states that are particularly eager to nurture new enterprises will even waive the $495 registration fee.

KCET's Day says ACE-Net is working to improve its shortcomings: "Because it's an SBA project, it does have more bureaucracy than if it was done by a private company. But they are doing as much as they can to make it a streamlined process." Still, raising money is almost always a time-consuming, diabolically detailed job. Many entrepreneurs may find ACE-Net's red tape too nettlesome. But as most soon find out, angels with real money rarely go into a relationship blind.

By Dennis Berman in New York

To: FINANCE