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Special Report (Enterprise) Finance: RAISING MONEY
REELING IN CASH ON THE NET
Entrepreneurs find a new lure for startup funds
When David C. Loring set out to raise $2 million for a startup venture producing a syndicated TV dating show called Men Across America, he knew he would have trouble obtaining financing. "Our balance sheet wouldn't support bank loans," says Loring. As for going public, "we were too small to be of interest to any brokerage." So Loring decided to bypass Wall Street and take his offering for Interactive Holdings Corp. directly to the public.
This spring, Loring launched his own site on the World Wide Web, complete with a prospectus (http://www.thevine.com/ihchome.htm). But Loring, who plans to keep his offering open until fall, isn't the only one searching for dollars online. Indeed, for Loring or brewmaster Andrew Klein (page 8), the Internet is becoming the pathway to financing that might not otherwise be available. It's also giving entrepreneurs a way to avoid losing control to venture capitalists. "They want half your company before they'll write a check," complains GIC Golf Co. CEO Paul P. Partyka, who hopes to raise $1 million via the Internet to begin production of a new golf club designed to get duffers out of bad lies.
ICEBREAKER. But for entrepreneurs who still want to tap into the support venture-capital firms can provide in developing marketing plans and recruiting management, the Internet can also help. For as little as $25 a quarter, the FinanceHub Web site (table) allows entrepreneurs to list projects in a database for public perusal. For $99, they can search what the site's operator, InterSoft Solutions Inc., claims is a list of 11,000 venture funds.
Indeed, nearly two dozen venture firms have their own Web sites, and most openly encourage entrepreneurs to send them proposals via E-mail. "It's tough for a young entrepreneur to get up the courage to call a venture capitalist, so E-mail helps them break the ice," says Ann Winblad, partner in Hummer Winblad Venture Partners, an Emeryville (Calif.) firm that funds software startups. Winblad says that since last fall, nearly 20% of the proposals her company has received have come unsolicited via E-mail. It agreed to fund two of the projects.
Small-business advocates in government realize that the Internet could represent the missing link in their efforts to give entrepreneurs broader access to capital. Forty-two states have enacted laws that allow small businesses to raise up to $1 million a year without the costly registrations required of larger companies. But this streamlined process--known as Small Corporate Offering Registration (SCOR)--has been disappointing. Since 1988, only 753 companies have filed for public offerings, according to the newsletter SCOR Report.
FARM TEAM. Experts believe the Internet can help patch two of SCOR's critical weaknesses. Online access would give companies a wider net to cast for investors and would provide investors with a secondary market in which to sell their shares. Already, Klein's Spring Street Brewing Co. has received approval from the Securities & Exchange Commission to provide a matching service that allows its investors to post their own buy and sell offers (page 10). A California financier, Clay Womack, is awaiting federal approval to let his own online service--SCOR-net--begin trading multiple companies' shares. "Our goal is to become a Triple-A farm team for the stock exchanges," says Womack.
Regulators acknowledge that the new world of online investing has a high potential for fraud and manipulation. At the same time, they seem reluctant to derail what they recognize could be a powerful tool for capital formation. "We want to make sure we don't impede the new use of this technology, unless there's a reason to do so," says Arizona Securities Commissioner Dee Harris. As long as this remains an honest game, the Internet is ready to give Wall Street, venture capitalists, and lenders a tough run for their money.By Dean Foust in WashingtonReturn to top