The Do-It-Yourself Angel Round

Getting serious about growing your company but can't afford to hire an investment bank? Here's how Mark Torrance, CEO of StockMaster, raised capital without surrendering big chunks of equity.

HOW TO FINANCE [almost] ANYTHING

Looking for capital? Here's how one company bootstrapped its own funding

Back in 1993, when he began StockMaster.com Inc. as a graduate student at MIT, Mark Torrance had no idea it would blossom into a viable business. All he wanted, at first, was a way to chart his own portfolio without breaking out the graph paper. By the summer of 1996, however, things had changed dramatically. Torrance now ran the company out of his condo in Quincy, Mass. He'd moved StockMaster to an Internet service provider's servers, since it had been using too much bandwidth over at MIT. His wife, Leslie, had $30,000 in company-induced debt on her credit card. And Torrance had become what seemed like an anomaly in the 1990s business world: a tech-savvy Internet founder without wads of start-up funding.

By the end of 1997, StockMaster had broken another Web stereotype: it had turned a profit on $1 million in revenues, which came from its advertisers and from designing and producing content for investor-relations Web pages. By that time Torrance had moved the company to Silicon Valley. But by the end of 1998, StockMaster still had gotten no seed money -- even though it was again profitable, on sales of $1.8 million. Torrance's patience was melting. "We had 12 employees, and I was stretched completely thin," he says.

Torrance knew he needed capital, but like so many other small-business owners, he was in a bind about how to get it. He couldn't afford to hire an investment bank; he also didn't want to take himself away from the day-to-day issues. His solution: he turned to someone he'd recently hired, chief financial officer Jim Drury. Over the next two months Drury developed a capital-raising game plan, by both studying how other companies had done it and networking with alacrity. His strategy ended up paying huge dividends for StockMaster and can serve as a useful primer on capital-raising fundamentals for any company.

Of course, when Drury set out to raise money, StockMaster, with its five-year, highly bootstrapped run, looked a lot more like a conventional brick-and-mortar small business than it did a cash-infused Internet start-up. And like many of his not-com cohorts, Torrance wasn't overjoyed about his financing possibilities, despite all he'd heard about an abundance of capital out in the Valley. Yes, he'd had some attention from venture capitalists. But "I thought their offers would be more like buyouts. VCs might say, 'Give up two-thirds. We'll grow it for you,'" he says.

The venture folk, naturally, have their reasons for wanting control. "I've heard of venture funds asking for as much as 90%," says Bill McCready, president of Venture Planning Associates Inc., a financial consulting firm with a venture arm. "That's because a lot of these entrepreneurs have no business experience."

But Torrance, now 30, had come too far to relinquish so much. So that's where CFO Drury came in. His first decision was that StockMaster should target angel investors rather than the venture community. The decision aligned with Torrance's company goals. Both for the sake of control and to maximize cash-outs through an initial public offering, Torrance's main capital-raising agenda was to not surrender big chunks of equity. "It's my first company, and I value highly how much wealth I'm building," he says.

Despite his 18 years of accounting and finance experience, Drury didn't have much of a track record in angel wooing. So he began his search for would-be investors with two trustworthy sources: his fellow employees and the company's attorneys at Pillsbury Madison & Sutro, a firm known for its work with emerging businesses. He asked that they refer him only to angels who'd made seed investments before. One particularly helpful employee was president and chief operating officer Troy Anderson, whose father was acquainted with angel John Stephens. In addition, Drury found four investors by schmoozing with Barry Turkus, the president of BT Commercial, StockMaster's real estate brokerage firm.

Mark Torrance had come too far to relinquish so much. His capital-raising agenda was to not surrender big chunks of equity.

Drury also turned to the company's law firm to help get himself up to speed quickly. Officially, his agenda with Pillsbury Madison & Sutro was making sure that company records and employee-stock-option agreements fulfilled legal requirements for a first round of financing. But Drury also hoped to learn from his lawyers how successful IPO-bound companies had behaved during their early-stage offerings. "I'd show them documents I'd found and ask them why one company did something different from another," he says.

Soon he was acting in a similarly inquisitive manner with his accountants at PricewaterhouseCoopers. In doing so, Drury discovered several capital-raising principles, many of which were de rigueur to them but foreign to him. He learned, for example, to issue equity in preferred stock rather than in common stock in order to avoid what's known as the "cheap stock" issue. That problem can arise if the Securities and Exchange Commission sees a large discrepancy between an IPO stock price and the price at which pre-IPO common stock options were issued. The SEC may then require that companies record an expense on par with the disparity. "In the Internet world, where there are some extremely high IPO prices, you can end up with some significant charges," says Jim Burton, a partner at Grant Thornton's San Jose office. "We've seen it in the millions."

 1 | 2 | 3  NEXT