The second of two parts

When David Ronick was looking for seed capital this past September for his networking site BranchOut.com, he hit nothing but dead-ends. He had already invested $150,000 of his own savings and tapped family and friends. With few alternatives left, Ronick decided to register with two Web sites that offered to match entrepreneurs and investors.

He came up empty-handed again. "It could have been that there were too few investors involved or that the types of investments they were looking to make didn't fit us," Ronick says. "But I also felt that the sites themselves were fairly impersonal and didn't provide feedback." Most annoying, the people who contacted him proved to be financial services firms and brokers trying to sell him something.

Then, Ronick checked out Amis Ventures on a friend's advice and realized he knew site founder David Amis from Harvard business school. With Amis' help, Ronick refined his business plan to fit the site's format. Ronick quickly got nibbles from 10 investors. "Within a month, we were able to raise $200,000" from four investors, says Ronick, out of $1 million he ultimately raised through his own networking. From registration to the day he put the money in the bank, four months had elapsed.

CRITICAL MASS. The idea behind Net matchmaking services is to connect people who wouldn't otherwise meet. But Ronick's experience suggests that -- as with any financial transaction -- you'll probably get better results if you have some idea who you're dealing with. Says Ronick: "It's important that a site have the kind of critical mass to make it worthwhile. But you also need to be able to get a sense of who the investors are and what are their interests."

For people who don't have contacts from Harvard to reassure them, here's a tour of some of the best-known matching sites: Garage.com; the Small Business Administration's ACE-Net (Angel Capital Electronic Network); Washington (D.C.)-based Amis Ventures (www.amisventures.com); Chicago-based Venture Capital Online (www.vcapital.com), founded by one of the original investors in America Online; and The Elevator.com, a recent addition to the online matching universe.

Each site has its own special characteristics: High-profile Garage is only for high-tech companies. It's the only registered broker/dealer of the lot, which means it can legally become involved in each transaction -- for example, recommending investments. (Without a broker/dealer license, sites can only make introductions.)

Amis Ventures says it focuses on companies seeking seed funding from $50,000 to $2 million. It promises to return fees if clients feel service was inadequate (no one has asked yet). Venture Capital Online is for those seeking venture-capital fund investments; ACE-Net only takes entrepreneurs who have the wherewithal to write a prospectus; and Elevator says its appeal is partly political -- an antiestablishment attitude toward regulatory obstacles to freer investment in small business, as well as an emphasis on the smallest companies and investments.

Entrepreneurs interact with the sites' managers mainly when they're preparing their presentations. Once that's done and their pitches are posted, they wait to see if they have any responses. Most matchmakers limit business plans to two to four pages. The exception is ACE-Net, which requires entrepreneurs to fill out a 50-question small corporate offering registration (SCOR) form, generally requiring an attorney's help. The others may seem stingy by comparison. But the sites say they render a real service in making entrepreneurs pare their pitches to the essentials, because investors won't wade through much more.

CREDIBILITY. Wyatt Starnes, CEO of TripWire Security Systems Inc., agrees. He credits Garage's help in refining his business plan with the results he got -- $2.4 million from angels and venture capitalists for his intrusion-detection software company. "The matching site helped create the focus, and its high profile helped create the credibility," Starnes says.

Each site has its own variant for drawing up business plans. Venture Capital Online says it uses proprietary templates to guide entrepreneurs. Amis Ventures' staff puts business plans through several edits and phone discussions, subjecting entrepreneurs to the kind of rigorous questioning they can expect from investors.

One question such sites raise is how much they can really do for either entrepreneurs or investors legally, if they remain just that -- matching Web sites. There are fine lines between acting as a financial adviser to entrepreneurs and editing business plans -- ditto for matching proposals with investors' criteria and encouraging one investment over another.

No lawsuits have emerged from disputed investments or guidance on business plans from matching sites. The U.S. Securities & Exchange Commission is watching to see that these sites don't overstep their bounds. "The key factor to consider is how the site is being paid: Does it have a stake in the outcome of a transaction -- or is it holding or handling a client's securities?" says Catherine McGuire, chief counsel for the SEC's division of market regulations. In other words, if they earn commissions or do more than act as bulletin boards, they have to be registered as broker/dealers. Another issue is how well the sites comply with SEC 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.

With the Internet blurring the lines of financial regulation, one site, ACE-Net, has obtained an SEC letter of no-action, stating that its activities comply with securities laws.

Meanwhile, Elevator's founder Bill Tucker, who has posted critiques of SEC restrictions on investment in small private companies on the site and initially said he would accept unaccredited investors, has changed his mind -- although he hasn't ruled out the possibility for the future. For now, though, he will only accept accredited investors. "The law in this area is antiquated. But for now, we're going to stick with accredited and sophisticated investors pending approval [of a letter of no-action] by the SEC," Tucker says. For both entrepreneurs and investors, the watchwords in Net money-hunting is no different from anywhere else: Know what you're getting into.

By Stefani Eads in New York
stefani_eads@businessweek.com

PART I: Are These Matchmakers Made in Heaven?
TABLE: What Matching Sites Have to Offer
To: FINANCE