Just sorting out the many matchmakers on-line can leave you feeling bewildered. Some charge high listing fees; others take an equity stake. Some offer opportunities to meet investors in person; others are mere databases, and secretive at that. Often, it's not easy to get information on companies or investors at those sites. And most are too young to have a credible track record.
Clearly, it's daybreak in this brave new world of on-line venture financing. And it feels as if the dawn of E-commerce was just a few short years ago. Every week, it seems, there's a new player entering the on-line financing fray. As with E-commerce, plenty of prognosticators believe it will all happen soon. "In the next five years, I think the majority of debt and equity financing will be done on the Internet," says Batterson. Others remain dubious that companies can raise a dime on-line.
More investors
"The jury is still out" on the angel matchmaking services, says Ray Smilor, vice-president of the Kauffman Center for Entrepreneurial Leadership Inc., in Kansas City, Mo. "A minuscule number of entrepreneurs will get money. So there's going to be a lot of frustration."
It's true. For now, those hitting pay dirt through a Garage.com or a Seedstage.com form a very exclusive club of mostly high-tech companies. That's unlikely to change for some time to come. But eventually, a much wider spectrum of start-ups and growing companies should be able to tap on-line investors.
One reason the on-line matchmakers are multiplying is simple: there are tens of thousands of companies that can't get financing today. In fact, not even 1% of the 300,000 or so companies growing 20%-plus a year are backed by VCs. VC groups and investment banks, habitually understaffed and overwhelmed by the number of business plans that come in, simply can't keep up with demand.
By stealing some of the good deals, matchmakers are forcing VCs to take notice. John Thornton, a general partner at Austin Ventures, a Texas venture firm specializing in seed capital and managing $800 million in traditional private equity, predicts that in the next few years VCs will "redouble their efforts in seed- and early-stage deals." To make sure Austin Ventures stays abreast of the next wave of Southwestern superstar start-ups, it has chosen to be a sponsor of Seedstage.com. If such sponsorships succeed, we'll see more on-line players jumping in to fill the capital gap below $3 million.
There's another good reason matchmakers should one day help many more companies gain access to capital. Legions of '90s self-made millionaires are joining the angel ranks. All it takes is somebody to organize them. The typical angel today, says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire, "is a cashed-out entrepreneur who's very familiar with the Internet."
What's more, angels' investment interests are more eclectic than those of classic VCs. In theory, the Internet should help companies find angels who know about their industry, wherever those investors may be. And there's at least some evidence that the Internet can bring together investors to aid nontraditional candidates for capital. Dan Mitchell, director of the ACE-Net office at Southern Connecticut State University, shares the details of a courtship begun on-line. A company marketing a diet program was looking for $2 million in equity financing. A group of five angels responded to the initial on-line pitch. A deal was struck in June: the angels will kick in $2 million in four installments of $500,000 each and bring some needed expertise to the diet company's management team.
For now, though, the Net is helping companies that probably would have found financing eventually. They're just getting at it sooner on-line. Wyatt Starnes, CEO of Tripwire Security Systems Inc., in Portland, Oreg., is another beneficiary of Garage.com. Starnes relates that he closed on $2.4 million in private equity in less than six months. "This is my third company, and it's the most money I've ever raised personally, the fastest and least painful," he says. "I've made the cold call to Sand Hill Road. It's tough."
Risks and Realities
The Internet, says Jim Peters, a partner with Ernst & Young LLP, in Los Angeles, "is clearly going to be a source of additional capital for entrepreneurs and developing companies--directly or indirectly." But, he adds, "it also wouldn't surprise me if we see hang-ups that could have a chilling effect on investors." Any of these hang-ups could be a deal killer: a weakened economy, Internet stocks in the Dumpster, the first well-publicized bad deal from the likes of Garage.com, or an increase in the number of fraudulent stock offerings.
"The Web offers a wonderful opportunity for companies to reach investors," notes John Stark, who heads the Securities and Exchange Commission's Office of Internet Enforcement. "But it's also a great opportunity for scam artists to reach investors. That's my concern with matchmaking services, small offerings, and everything else" on the Internet.
The bottom line: the system is full of promise, and there are plenty of kinks as well. At the moment the biggest advantage of the Internet matchmakers may be an unintended one. If the Kawasakis of the world can "give entrepreneurs a fast no, that's a great benefit," says the Kauffman Center's Smilor. "A lot of entrepreneurs don't understand what different investors want, and that's where the frustration comes in."
Ironically, at this stage of the game, when finding cash on-line is in its infancy, company builders may get more bang for their buck from all the off-line activities sponsored by the on-line money finders--the start-up boot camps and venture forums and finance workshops. "My hope is that all of this will raise the educational component to raising capital," says Smilor.
Other observers agree. "To think the actual deal can be consummated on-line is wrong," says UNH's Sohl. Ultimately, the process of marrying entrepreneurs with the right backers is just too precarious and personal a business.
Starnes, the CEO of Tripwire, shares the story of how he and Kawasaki finally hooked up: "I had this E-mail exchange with Guy for a few weeks, but nothing happened. Then Guy came to visit me in person, luggage in tow." As in many areas of E-commerce, sometimes there's nothing like meeting face-to-face in the real world.
Susan Greco is a senior writer at Inc.
