Is Internet Financing Too Good to Be True?
Q: I have been reading articles about finding investors on the Internet and have looked at some Web sites that promise to introduce angel investors to start-ups like mine. (With a partner, I am launching a specialty catalog selling upscale, contemporary Asian home furnishings to the U.S. market.) The problem is, those Web sites charge a hefty price to post my company's information, which I don't mind if I can be sure to find funds for my company--but I'm not going to dole out hundreds here and there without any sense of what return I'll get. Have you heard whether the services are successful? Also, how do we check out the legitimacy of financing offers that we receive over the Internet? -- Francine Huss, CEO, The Far Catalog, San Francisco, Calif.
A: You're right to be cautious. "People need to remember the way that investment markets have always worked, which is that companies and their advisers network with investors, investment bankers, and others who are looking for profitable places to put their money," says Carl F. Jenkins, director of management-advisory services at the Boston accounting firm Brown & Brown. "Reputable investors already have access to all the good deals they can handle, plus more. What you find is that many of the people who are using the Internet are either marginal types or, for whatever reason, looking for marginal deals." That's not to say there aren't reputable financing Web sites, but, he notes, "there are also plenty of electronic scams."
Michael A. Epstein, a partner at New York City law firm Weil, Gotshal & Manges, emphasizes that both the anonymous and the international natures of the Internet can create problems. "It is very difficult to assess the credibility of someone on the other end of your communications," he says. "What makes matters even more complicated is that you may be dealing with someone in another country--without even knowing that fact--where the regulations regarding what you can and should disclose during fund-raising activities are very different."
What about the cost of listing your company on a matchmaking site? "There are no easy answers when it comes to raising money for your company--and the Internet certainly isn't going to provide them," Jenkins observes. "If you've done your homework, checked out a site, confirmed its credibility, and also verified that your company fits the parameters of its investors, then how different is spending this money from taking 5 or 10 different investment bankers to lunch while you're trying to pitch your deal? You just can't do this on the cheap." --Jill Andresky Fraser
Checking out investors
"If you're working through the Internet--just as when seeking financing through any other sources--it's absolutely essential to check people's references," advises Bill Wetzel, director emeritus of the Center for Venture Research at the University of New Hampshire. Keep in mind, though, that you'll have to verify the credentials of those references just as carefully as you're checking out your prospective investor or money broker. "Don't be satisfied to just send off an E-mail to someone or make a phone call--there's no guarantee that anything they will tell you is true," Wetzel emphasizes. He adds that you should always contact an investor's banker as part of your reference check.
Wetzel also warns against paying any up-front fees to money brokers you find on the Internet or elsewhere. (Unlike matchmaking sites, which are basically just listing services, money brokers promise to actively network on your company's behalf to raise capital.) "The way legitimate deals get done is usually by paying a contingency fee and probably a piece of equity," Wetzel notes. One final piece of advice, from Epstein: "Even if you manage to find someone through the Internet, never accept an investment from someone who doesn't want to meet you and see your company in person. That's a problem just waiting to happen."