Tips for Making a Good Match on the Web
In love and investment, the old rule still applies know who you're dealing with
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
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
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,"
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
By Stefani Eads in New York
PART I: Are These Matchmakers Made in Heaven?
TABLE: What Matching Sites Have to Offer