<<

. 34
( 62 .)



>>

192 RESOURCES FOR ENTREPRENEURS RAISING CAPITAL


Date Founded $ Amount
Organization (if available) Invested
International Capital
Resources (only 60 of
1,359 investors) 91,000,000
Band of Angels 45,000,000

Investors support and attend these events and participate in networks,
activities that result in introductions simply because forums offer a time and
cost-efficient way to augment deal flow with promising high-growth ven-
tures in need of early-stage equity investment and because these forums offer
exposure to a wider range of deals.
While some promoters use the term venture forum to describe what are
essentially educational events, entrepreneurs should attend only those events
whose sole objective is to provide investors and entrepreneurs the opportu-
nity to meet face to face. Although forums may include keynote speeches or
perhaps offer a panel discussion by investors, the most productive venture
forums for meeting investors are among those that allow entrepreneur pre-
sentations of 10 to 30 minutes, similar to an abbreviated investor road show
supported by visuals. To have any credibility with investors, the forum must
require a rigorous prescreening process implemented by the host organiza-
tion and its screening executive or committee to ensure top quality deals for
investors. A few forums listed in the directory also provide entrepreneurs
with advice on their presentations and business plans included as part of
their application fee. Some “deal mart” events allow companies that previ-
ously failed to be selected as presenters to display information about their
venture at a table or an exhibition booth. The most successful forums enable
entrepreneurs to meet with investors directly after the presentations or ex-
hibiting, either in break-out rooms or less formally in social gatherings, such
as cocktail receptions hosted by sponsors.
Understand that the prospect of meeting face to face, whether you are a
presenter, exhibitor, or attendee, is the chief element in selecting which fo-
rums to attend. For example, if the forum hosts an investor panel during
which an investor discloses investment criteria consistent with the parame-
ters of your deal, you have the opportunity to approach him or her directly
during networking breaks to introduce yourself and begin to build a rela-
tionship. This is true whether you are a presenter, an exhibitor, or just an at-
tendee in the audience.
The longevity and success of the most respected venture forums illustrate
anew government™s role as a barometer reflecting, rather than a catalyst driv-
ing, change. The government is just beginning to recognize that forums
hosted by nonprofit groups facilitate the exchange and flow of capital from
both respectable institutional investors and astute private investors. Further-
193
Alternative Funding Resources in Accessing Angel Capital


more, forums allow these investors a glimpse of deals they would otherwise
be unaware of, and at the same time offer entrepreneurs a golden opportu-
nity to acquire funds they have searched for fruitlessly on their own.
Sentiment for change in the government™s attitude about forums appears
everywhere. Eighty-seven percent of the respondents to a poll conducted by
California Capital Access Forum agreed that the Commissioner of
Corporations should exempt introductions at venture and investor matching
events from being considered as public advertising of private placements.
One hundred percent felt that the commissioner™s office should provide guid-
ance in this matter of advertising, advertising presently prohibited by
California Statute 25102(f).
Through such grass roots polling and other rising pressures, both the
SEC and state departments of corporations are beginning to recognize that
laws enacted to protect unsophisticated investors from unscrupulous indi-
viduals inappropriately restrict deals introduced by experienced entrepre-
neurs (principals in the ventures) to seasoned investors (highly astute
financial analysts with industry track records in this type of investing).
Venture capital clubs operate like venture forums. The chief differences
are that clubs are smaller, less formal, and meet more often. But screening of
ventures is just as rigorous, although fewer companies present at their meet-
ings and the presentations are shorter. Venture capital clubs that had their
start in 1974 with the Connecticut Venture Group are a specialized spin-off
not unlike the small investment groups that comprised associations such as
the American Association of Individual Investors (AAII). These groups
brought together a number of novice investors, supplied them with the
proper material, and assisted them in building a portfolio. Maybe they
pooled their money; maybe they did not. Perhaps they just worked together.
They operated much as informal angel networks do today, but used group-
think to improve their understanding and appreciation of investing. Figuring
prominently in the mix was the camaraderie and preference to co-invest and
share due diligence.
But because traditional investment groups emphasized publicly traded
stocks, those interested in venture capital did not feel welcome. So there has
come the spin-off of the venture capital club movement, numbering about
150 to 200 venture capital clubs across the country, with typically 12 to 80
members. Members tend to be geographically focused, smaller investors, al-
though the clubs typically include a few more affluent, seasoned angel in-
vestors who serve as mentors, as well as participants in transactions. Within
the angel investor community, we find a bimodal distribution: One segment
invests smaller amounts ($10,000 to $50,000); a second segment invests sig-
nificantly larger amounts ($100,000 to $1,000,000) over the course of a
transaction.
Although individuals in a venture capital club could maintain their pri-
194 RESOURCES FOR ENTREPRENEURS RAISING CAPITAL


vacy, the venture capital club publicizes its endeavor, which stimulates deal
flow to the club. This allows individuals to share the deal flow, which in-
creased geometrically, but also share the responsibility of due diligence as
well as the investment™s risks. A complete list of venture capital clubs in your
region is available by contacting ICR at www.icrnet.com. Also, some of the
most prominent venture clubs are listed in the directory in Chapter 9. In ven-
ture capital clubs and offline investor networks, the majority of members are
accredited investors, and the most prominent organizations require a mem-
ber to complete a legal form attesting that he or she meets the previously de-
fined “accredited” status. Members pay dues to help defray operating costs
associated with administering the organization, promoting its events and
conducting meetings.
Some investor groups have become more formalized, and members are
expected to meet investment requirements of the group. Perhaps they are ex-
pected to invest a minimum amount each year or pledge to invest an amount
over time, for example $25,000 to $150,000 over a number of years. Much
like ICR™s own network of investors, many new members come not from
having seen an advertisement but from a referral from existing investors sat-
isfied with their experience and involvement in the group. The club or group
typically has a paid manager or director responsible for operations.
Venture capital clubs usually hold monthly meetings, a breakfast or din-
ner meeting, for example. The programs are similar. There may be a guest
speaker, entrepreneur, or investor, followed by presentations by prescreened
companies sponsored by a member. The pitch can last for as little as five min-
utes to as much as 30, depending on how many presenters the group has
scheduled. Added to that are questions from the audience.
Some clubs or groups will decide as a group, through voting, for in-
stance, whether to move to the next step with the company by assigning a
member to take the lead in due diligence. Depending on the organization,
after due diligence is shared at a subsequent meeting, the group may decide
to invest or reject, or individuals may pursue or reject the deal independently.
Prescreening of deal flow is a major activity of these groups. A screening
committee or senior member may join with analysts to prescreen and review
documentation on the ventures submitted for consideration. They assess
whether the deal fits their criteria. Regardless, the deal reaps serious consid-
eration, possibly securing a “sponsor” for management that helps the deal
along among existing members of the club or group.
We believe that in the next few years entrepreneurs will see the advent of
a cohesive infrastructure provided for active investors through regional in-
formal networks, more formal investment clubs with a professional manager,
and, for more passive investors, pledge funds, as well as limited partnership
funds specifically for angels. By pooling money and sharing risk, the duties
195
Alternative Funding Resources in Accessing Angel Capital


involved in the angel process, and the tasks associated with it, more formal
angel investment structures can open the door to larger, more developed
deals of less risk for investors. By sharing the task with more experienced in-
vestors, novice investors can avoid pitfalls, and so create more informed
evaluation, as well as help to increase angel investors™ co-investment re-
sources and access to portfolio diversification.
For example, a large number of benefits emanate from the angel club
concept. We think that these represent something less organized than a fund,
a more informal structure that active investor colleagues tell the authors they
are looking for. They help reduce some risk, and in many cases do so with
less resource obligation. It™s a great help in processing deal flow, especially
when you start generating high levels of deal flow and it helps to leverage in-
vestor™s time, energy, and financial cost associated with due diligence. It al-
lows the members to candidly become the sponsors of the deals they like
among a peer group, and it allows the highly isolated angel investor who
may not live in a major metropolitan area to expand their co-investment cir-
cle. It provides a discreet way for mentorship of less experienced investors,
and it can, from our experience at ICR, expand due diligence. All these fac-
tors combine to reduce the risk of early-stage investing.
By organizing deal flow development mechanisms through the club, the
deal flow is increased and, because numerous people are involved in the club,
managing the due diligence for the larger deal flow or at least the prescreen-
ing process becomes more feasible. Because membership includes angel in-
vestors from a range of disciplines and functional types of expertise, the
ability of the club improves not only to invest but to help get the companies
into shape for future institutional or venture capital rounds.
Our research does suggest that about 65 percent of angel investing is
done on a regional basis anyway, and this lends itself to the idea of regional
investment clubs. Currently, the regional focus is sometimes refined further
to an industry focus, or a stage of development focus. Also some angel clubs
have developed an incubator division by packaging the expertise of the an-
gels who provide advice for business, function in an advisory board capacity
to presenting companies, and assist companies further in raising capital.
The bottom line for entrepreneurs is the capital. When dealing with
clubs or offline investment groups, investors can invest capital in different
ways; for example, individuals invest directly into the company; the club
could set up a fund or LLC that collects money from members; then a
fund/LLC invests in the company, or the organization itself may pool money
of members with outside investment partners, and the organization itself in-
vests into the company.
The offline investor network offers a different type of resource. ICR uses
a number of proprietary and pioneering techniques to build angel and pri-
196 RESOURCES FOR ENTREPRENEURS RAISING CAPITAL


vate equity investor databases, develop deal flow, enhance entrepreneur doc-
umentation and presentations, and facilitate bringing ventures and capital
together. The firm uses all the mechanisms listed as alternative funding re-
sources in conjunction with its proprietary database of investors to identify a
“fit” between a qualified venture and an investor™s criteria, and to help bring
the parties together and build relationships that lead to financing. The 17-
year successful history of the firm is available at www.icrnet.com.
Wealth management professionals understand that as the size of the
wealth market increases every day, so too do they need to be aware of the
new breed of investor and potential client. Affluent investors now expect and
demand online access to information, security, and the same high level of
client services. The key for these professionals is to ensure that their Internet
efforts meet the desires of current clients, as well as attract the newly affluent
market. Using online financial services is more common today than five years
ago. However, the concerns for privacy protection and confidentiality of in-
formation online remain the same.
The next category of alternative investor resources is online matching
and search services. The oldest is the MIT Venture Capital Network.
Whenever computer technology matches the criteria of an investment with
those of the investor, the network sends the investor an executive summary
describing the venture. This process preserves confidentiality”the big
issue”while creating an added value: Investors receive only those deals that
meet their criteria. These networks supply a valuable service, and studies
echo the refrain of participating investors: They appreciate the screening and
the privacy that these organizations furnish.
Of course, since few charge fees beyond those for the processing of doc-
uments, these networks also provide entrepreneurs and investors with an in-
expensive mechanism to expose their deals. And to avoid conflict with
securities laws, networks charge no finder™s fee. Still, they do endure a rigor-
ous qualifying procedure before being granted their nonprofit status.
Investing or finding investors or investments online is different from
other alternative resources because most experts agree that angel and venture
capital investing is felt to be based on a face-to-face relationship. Since the
Internet may be changing these expectations somewhat, entrepreneurs
should contemplate the options offered on the Web when they consider the
financing tools they might use to gain access to private equity investors.
Today™s entrepreneurs need to adapt and learn new roles and responsibilities
in accessing the newly affluent.
Though predicted in the late 1990s pre“dot-com bubble burst era by
business magazine sages and research gurus, the “capital democracy” that
was supposed to emerge from the Internet and create an active, efficient cap-
ital market linking investors and entrepreneurs in low-cost transactions has
197
Alternative Funding Resources in Accessing Angel Capital


not yet materialized. Venture capital is not being raised in large amounts on-
line, nor has angel capital matched online swelled to the optimistic levels pre-
dicted at that time.
Our research for the resource directory in Chapter 9 confirms this. We
visited more than 2,000 online web sites, compiled as finance resources be-
tween 1998 and 2003. These were publicized or described as alternative
funding resources that fit our listings presented in this chapter. Of the 2,000
sites, 85 percent were out of business; the domain name was for sale, or the
owners had changed their business to something other than facilitating early-
stage financing. This is a sobering fact for entrepreneurs assessing various al-
ternative funding routes, paths, and mechanisms, because if they are going to
spend time and resources on trying to raise capital, they want to make sure
they are using an effective resource.
Private equity investing is not being changed by the Internet, but it can be
helped by it. The higher ROI potential and the recent recovery of segments of
the venture capital market will continue to fuel interest in private equity in-
vesting over the Web. The freedom of viewing deals, easily and quickly, at
minimal cost of time and money on well-designed, full-service sites continues
to be a draw for some investors, a number that will likely increase. As long as
the site addresses the most pressing concern of the wealthy market”privacy
and security”then the web sites have a chance. The safety of information
available online must not be compromised. Sites must protect the investor™s
identity, contact information, and choices. In addition, web site managers
must absorb relevant SEC and National Association of Securities Dealers
(NASD) guidelines. (We refer the reader to our Appendix B for details.)
The concept that entrepreneurs will meet angels through an Internet
network does seem to contradict much of what we have emphasized in this
book. Investors prize their privacy (we need hardly say it again) and will be
reluctant to share on a web site their names, addresses, and the like. To do so
would expose them to every crank deal and oddball character in cyberspace.
So the way for entrepreneurs to take advantage of these resources is to look
for respected sites, sites with a history, sites willing to publish their invest-
ment results, provide significant security measures, and, most important,
post only prescreened deals that meet their investors™ posted criteria. Also,
these sites must meet all state and federal legal requirements. Listed in our di-
rectory are a number of Internet matching and search services still in opera-
tion and that claim to have investors.

<<

. 34
( 62 .)



>>