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FINANCE

3.30.99  
Are These Matchmakers Made in Heaven?
Web sites that promise to link investors and entrepreneurs are popping up all over. Join us on a critical tour

The first of two parts

It's called an "elevator pitch." That's what entrepreneurs rehearse on the wild chance they'll share a short ride in an elevator with an investor and have only a few floors to sell their business plan.

Of course, few ordinary mortals could woo anyone in under a minute. That's where Bill Tucker hopes to come in. His company, The Elevator.com, which he launched in February with $25,000 of his own money, is one of a growing number of sites that promise entrepreneurs better odds than running into investors in elevators -- via a Web-based matching service.

There's certainly interest in this electronic twist on money hunting. Elevator (www.thelevator.com) has already received 60 pitches from entrepreneurs in the U.S. and abroad, approved and posted 15 business plans, and registered one institutional and two individual investors looking to fund E-commerce and software startups.

The niche is quickly getting crowded: Elevator joins sites such as Garage.com (started by former Apple Computer buzzmeister Guy Kawasaki), the Small Business Administration's ACE-Net (Angel Capital Electronic Network, ace-net.sr.unh.edu), Washington (D.C.)-based Amis Ventures (www.amisventures.com), and Chicago-based Venture Capital Online (www.vcapital.com), founded by one of the original investors in America Online. There are others, but these are among the best-known.

That doesn't seem to bother Tucker, who was a freelance journalist for 20 years before turning to financial matchmaking: "There is a fantastic amount of original product and research coming out of the universities, the engineering schools, the business schools. But the mechanisms for entrepreneurs and investors finding each other are primitive."

In other words, finding a financier still depends heavily on luck and connections. The big question is: Can Elevator and its ilk do better?

The jury is still out. Of these sites, all but two-year-old ACE-Net have been in business less than a year. And it's not clear how many can survive. With the exception of Garage.com -- which invests in some companies that come to its site and has a registered broker/dealer affiliate that charges a commission for each investment -- these matchmakers make their money from annual registration fees, ranging from $500 for startups and individual investors to a few thousand dollars for institutional investors. It sure isn't easy money: To draw listings in their critical early months, Venture Capital Online, Elevator, Amis Ventures, and even Garage have reduced or waived fees.

Site creators say they're best at hooking up young companies with individual "angel" investors, who pump about $20 billion a year into more than 30,000 young ventures in the U.S., typically in lots of less than $1 million. Some also list venture-capital funds, which generally invest more than $5 million at a time.

NO FREE RIDE. Sounds appealing, but entrepreneurs should tread cautiously: Posting a business plan on a matching site may seem like less work than personal presentations to investors, however there's still paperwork -- in some cases, plenty -- and potentially thousands of dollars in attorneys' fees. And there's a wide disparity in resources and transparency among the sites. Before you pony up and launch your confidential business plan into cyberspace, you want to be sure it's worth the effort.

The sites operate on pretty much the same concept: They provide a bulletin board to post business plans; they forward plans to investors interested in similar companies; and they help entrepreneurs with their online presentations. Generally, entrepreneurs get access only to their own business plans and general site information, while investors can peruse all business plans. Also, entrepreneurs rarely know more than how many people have received their pitches until the phone rings. That's to protect investors from unwanted solicitations, says David Amis, founder of Amis Ventures.

"Most active, early-stage investors have more deal-flow than they care to have knocking on their door. And one of the benefits they get by signing up with a screening service like ours is that instead of them having a hundred people coming after them, they are able to reduce [deal-flow] to a handful of projects that are interesting to them," says Amis.

How do you even know if the entrepreneurs or investors listed on a site are legit? All the sites discussed here screen investors to comply with Securities & Exchange Commission rules that restrict most sales of high-risk securities to accredited investors -- those who have earned at least $200,000 for two consecutive years or have a net worth of at least $1 million. Most also require investors to fill out a questionnaire to show they're sophisticated enough.

Entrepreneurs, on the other hand, have no legal hoops to jump through. The exception: ACE-Net, which only accepts companies that meet certain SEC requirements. Garage takes just high-tech companies and screens applicants closely. So far, only about 30% make it onto its prestigious roster of investment opportunities. The other matchmaking sites have formats for presenting business plans and use the preparation process to establish a standard.

Who are the site owners, and what's their approach? That's easier to find out from some sites than others. On one end of the scale is nonprofit, government-sponsored ACE-Net, which details all its fees and services and even posts a letter from the SEC in publicly available areas giving its activities a clean legal bill of health .

Garage.com also posts such outside registration information as biographies and photos of its members, descriptions of its activities, and a disclaimer about its compliance with securities laws. Amis Ventures and Venture Capital Online make skeleton biographies and general investing information available to anyone who visits their sites. Amis Ventures lists statistical profiles of its investors and entrepreneurs, and describes some of the types of investment opportunities available. Venture Capital's site has a long, informative list of frequently asked questions that explain how the site functions.

In contrast, The Elevator.com gives only minimal information to unregistered visitors about the company, how the site works, or its founders. You'll find some details on Tucker -- mainly a list of periodicals he has written for in response to a visitor's request for background in the Networking section. A sketchy description of the site concept includes a critique of restrictions on soliciting private-equity investors. A summary of securities laws is also included in a column in the Networking section.

NEWBIES. At this point, it's hard to compare how well the sites are doing, partly because they're so new. But some site owners don't make it easy to assess their services. Amis, for one, will say only that "deals have occurred" through his nine-month-old site. Still, two sites do seem to be leading the pack. ACE-Net says 20% of its participating 105 companies have received funding. Of Garage's 14 approved companies, seven have found investors through the site.

Critics of online matching sites say the biggest question for entrepreneurs is who these sites really serve. "I see them as a service for angels -- a way to bring them deal-flow," says Christine Comaford, CEO of the startup venture-investment firm Artemis Ventures, which also advises entrepreneurs. "But as an entrepreneur, I find them terrifying." For Comaford, the sites are a great way for VC firms and individuals to do comparative research.

She also questions the value of simply posting a business plan -- especially for neophytes at fund-raising. "At the same time entrepreneurs are looking for funding, they're also looking for expertise," says Comaford. "One of the biggest problems at the startup level is not being able to hire enough executives, so most people looking for money are also looking for some guidance, too." Hand-holding, it appears, is hard to do over the Web.

Next in this two-part series: Tips for Making a Good Match on the Web


By Stefani Eads in New York
stefani_eads@businessweek.com


Top To: FINANCE

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