Get$$$Now.com
New online intermediaries are closing the capital gap for companies that have outgrown friends-and-family financing but can't get a backward glance from venture capitalists.
The Internet will change everything about the way you live--why not how you raise capital?
Ask Dr. Drew Pinsky a question about adolescent hot buttons, from sex and drugs to diets and zits, and he could talk for hours--and does, as the cohost of MTV's Loveline. But ask him about financing for an adolescent company, and Dr. Drew, as he's known, is pretty much speechless. "It's like being in a parallel universe, and my learning curve is straight up," says Pinsky, an M.D. and the personality behind a new Web venture called Drdrew.com.
However, in the past two years--ever since a boyhood buddy approached him about transporting his TV and radio franchise to the Web--Pinsky has received a crash course in seed capital. "Leave it all to me," said his friend and business partner, Curtis Giesen. But finding funding wasn't that simple--even for Giesen, a Harvard M.B.A. The business plan Giesen wrote for Drdrew.com was roundly rejected by investors. "I must have pitched it 100 times in a year," says Giesen. To no avail. Then last year he heard about Guy Kawasaki and his band of angel investors--comprising high-net-worth individuals, angel groups, and even a few of the venture-capital "gods" of Menlo Park's famed Sand Hill Road--convening under the banner of Garage.com. (See " A Match Made in...Cyberspace?")
Giesen threw himself at Kawasaki's doorstep. "I contacted Garage.com before the doors even opened." Drdrew.com was one of the first companies taken under Kawasaki's wing--that is, after an employee clued Kawasaki in on the opportunity. "The venture capitalists didn't know who Dr. Drew was, and frankly, neither did I. Thank God a young staff member here knew who he was and said, 'Hey, this is a hot deal." Apparently, Kawasaki's seed financiers thought so too.
It wasn't long before the angels got together and decided to create a dream come true. "Overnight, your business plan is listed in Heaven," explains Giesen, referring to the password-protected section of Garage.com where investors can find start-up companies that match what they're looking for. Word got around, and soon even top-tier accounting and law firms were courting the young start-up. "These people were calling me," says an incredulous Giesen. "It was a beautiful thing."
All the networking--on-line and off--culminated last January in a private-equity deal. In exchange for 20% of the company, Pinsky and Giesen raised $1 million. Five investors, including a media corporation, kicked in the seed funds, and two agreed to be board members. And now the partners can't say enough about the advantages of the Garage.com model. "We found angels we never would have otherwise," says Giesen, CEO of the company, based in Pasadena, Calif. Pinsky, president, concludes that Drdrew.com, scheduled to go live with daily "Webcasts" this month, "would not have happened without this."
Clearly, Drdrew.com benefited from Kawasaki's own brand of angel evangelism. He's one part mentor and one part the merry matchmaker. The former "chief evangelist" of Apple Computer, Kawasaki has started two software companies and has been an angel in five other companies. He has years of personal connections to draw on, but he's also using on-line connections to help entrepreneurs close the capital gap. Playing to the Internet's natural advantages, Garage.com screens business plans very efficiently, "narrowcasting" the best prospects to a select group of investors and enabling one-to-one E-mail exchanges between the investors and company founders. The capital gap
In other words, Kawasaki is closing the information gap at the heart of the large capital gap that exists for companies who've outgrown friends-and-family financing and can't get so much as a backward glance from VCs. The most gaping hole exists in deals ranging from $100,000 to $1 million, and, more recently, from $1 million to $3 million, as traditional VCs continue to invest ever larger amounts in just a few thousand companies each year.
Garage.com hopes to help to bridge the capital chasm by focusing on companies seeking from $1 million to $4 million. Some say it's fulfilling the promise of the Small Business Administration's ACE-Net, which for a few years now has struggled to facilitate through its listing service public and private offerings in about the same dollar range. (See " We're from the Government. We're Here to Help.")
Kawasaki, though media savvy, is far from alone in spotting an on-line niche. In fact, a slew of E-capitalists are taking aim at inefficiencies across the whole spectrum of capital formation. From seed capital to later-stage private placements, from direct public offerings (DPOs) to the initial-public-offering market, all along the line there's a renegade or two or three attempting to rewrite the rules and open up the game to more company builders and investors on-line.
The matchmakers
While some on-line ventures--such as Wit Capital and WR Hambrecht's OpenIPO to name two--have been lauded for helping to "democratize" the world of investing, the benefits to entrepreneurs have been less clear. To date, few of the new entries appear to be closing the most pressing capital gap.
That's why the sudden proliferation of on-line matchmakers aimed squarely at entrepreneurs looks so promising. Also known as money finders, placement agents, and "venture gapitalists"--to use Kawasaki's term--they all claim they can help founders slash the cost and time of finding start-up and growth capital. They can do this, they say, by tapping an expanding universe of angels over the Internet and using simple technology to match up the most suitable investors to a given company. To wit, a growing number of Web sites serve as portals to local angel groups. A prime example in the Southwest is Seedstage.com, based in Austin. Offroadcapital.com (see " The IPO Classifieds") takes the model to another level: it hopes to "aggregate" local angel groups into a national syndicate.
But can these matchmakers really close the capital gap? The answer's not clear. Seedstage.com, for one, focuses on helping high-tech-company founders locate from $500,000 to $1.5 million. That's a good start. But other sites are a letdown. In Chicago, an on-line "clearinghouse" called Vcapital.com, started by venture-capitalist Len Batterson, looks enticing, at least at first blush. But Vcapital.com is actually gunning for early-stage deals in the $2-million-to-$5-million range. That's progressive in some venture-capital circles, but it hardly rocks the world of entrepreneurs looking for their first $200,000. (On-line or off, of course, only growth companies can hope to get the attention of most investors.)
