NEW YORK – The emergence of online public offerings has been ballyhooed for its leveling of the playing field between individual and institutional equity investors. Now, the Internet has been developed as a host for private equity offerings, and while every side of the transaction may benefit, the long-term efficacy of Internet offerings remains a mystery.
When Mike O’Donnell contemplated raising seed capital for iCopyright.com, he feared that the distance between centers of venture activity and his start-up’s Seattle location would be a burden on his young company’s time and budget. However, that burden was partially averted when he took advantage of the garage.com Web site, where offerings are matched to the investment criteria of its investor group.
Mr. O’Donnell said that within 30 days of his offering being posted on the site, he had 60 qualified leads to both angel investors and venture firms whose investment criteria aligned with iCopyright.com’s planned $1.5 million round. After receiving these initial leads, the company chose a select group and provided those investors with a password to access the confidential information that would usually be presented in a private placement memorandum.
“That is where the online aspect fell apart,” Mr. O’Donnell said. “Interest was generated online, but closure came through getting on the phone and plane and sending hard copy.” Nearly all the commitments to the financing, which closed in early May at $2.8 million, stemmed from sources identified through garage.com.
The Dating Game
Chicago-based Venture Capital Online L.L.C. operates Vcapital.com, a Web-based clearinghouse for private equity deals. That site focuses on companies that extend beyond the seed-stage deals generally associated with online offerings, and, in fact, 63% of the deals that have been posted on the site thus far are defined as early- or expansion-stage offerings.
Additionally, Robert Cross, a managing director at the company, said the differentiator for online offerings will be a move toward providing a more targeted service and away from the “dating services” that are available on bulletin boards.
“The test of the service was signing up firms based on the quality of the site,” Mr. Cross said.
Thus far, Vcapital.com has reached agreements with 70 member firms that manage approximately $8 billion, including private and public management firms, corporate venture groups, financial institution venture groups and family venture groups. Mr. Cross and founder Len Batterson intend to expand offerings on the site to include service providers – auditors, law firms, placement agents – to provide a more complete service to the users of the site.
Entrepreneurs do not get away easy in this process, however. Both garage.com and Vcapital.com require submission to a lengthy exercise that includes providing descriptions of business plans and a company’s capital needs. Mr. Cross said the effort helps weed out fly-by-night concepts.
“That is an effective discipline to put on the entrepreneur, and it helps frame the business,” says Jim TenBroeks, managing director at Wind Point Partners, a member firm in Vcapital.com. that is pursuing several opportunities that originated at the site.
To be sure, the time saved makes the Internet an attractive device for Internet offerings. Capital raising is a severe drag on the resources of any start-up, and although the issue is not atypical at investment firms, properly targeted information that reduces the volume of plans coming through VC doors leaves more time for due diligence on plans that fit the bill.
Even after successfully raising this round on the Web, iCopyright.com’s Mr. O’Donnell was non-committal about using the Internet a second time. “If a banker has the right mechanism, we would pursue any legitimate source that let us tell our story to the right investors,” he said. “But the online clearinghouse would have to specialize in later-stage deals.”