Each week, the web-based, early-stage venture financing firm Garage.com receives hundreds of proposals from prospective high-tech startup companies looking for mentoring and investors. Only a few make it to "Heaven"-the section of the firm's web site dedicated to showcasing promising startups for its venture capital members and individual investor "angels." On September 27, Garage.com CEO and author of Rules for Revolutionaries Guy Kawasaki spoke at Wharton about Garage.com's operations and the criteria for successful fundraising in today's high-tech world. The talk was part of an on-going series of lectures at the school on the electronic commerce industry.
Kawasaki is no stranger to the process of starting a high-tech company. In addition to co-founding Garage.com, he is the former chief evangelist for Apple Computer, he has started two software companies of his own, and he has been an "angel" for three others.
"We find, fix and fund," Kawasaki says about the mission of Garage.com, which operates to fill the gap between what he calls "the three F's" in fundraising ("Friends, Family and Fools") and major venture capitalists who are willing to invest $5 million or more in seed capital for high-quality technology startups. "We help entrepreneurs raise about $2-$3 million to begin," he says, noting that this strategy places startup companies in a stronger position than they would otherwise be with higher levels of venture capital. "They would be too financially diluted," he says.
After carefully reviewing proposals submitted to the firm, Garage.com begins the process of "raising" startups by purchasing five percent of a company's common stock and then drawing the attention of investors by placing the company on its "Heaven" page. Through its own broker/dealer subsidiary, the firm raises money, charges a five percent investment banking fee, and then re-invests that fee in the company. "We are cash neutral," explains Kawasaki, "but we own five to six percent of each company." Since January 1, 1999, the firm has helped to raise over $60 million for 20 technology startup companies. Ultimately, Kawasaki says, Garage.com would like to invest in 40 to 60 companies per year.
The firm uses three major criteria for evaluating proposals: the quality of the team, the quality of the idea, and the quality of the market. "This is not a science, though," Kawasaki is quick to point out. "A lot of it involves gut feeling." He stresses the importance of having solid ideas about product building and selling. "Good ideas are easy," he says. "We see them everyday. But implementation is the key to a good company." And he offers two additional pieces of advice to would-be entrepreneurs: never tell potential investors you have no competitors (it's just too unrealistic) and always express a willingness to make changes in the management team.