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
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