Cyber cash

Entrepreneur, March, 1999 by Jane Easter Bahls

The sure thing that wasn't: As the initial frenzy subsides, the Internet's investment-raising potential is re-evaluated. Yes, the capital is out there - but only if you know where (and how) to look.

Andrew Klein made waves in 1995 when he raised $1.6 million for his New York City microbrewery by offering stock to potential investors over the Internet. Magazines and newspapers nationwide trumpeted the first Internet-based initial public offering (IPO), grabbing enough attention for Klein to pull in 3,500 individual investors for Spring Street Brewing Co., which specializes in Belgian-style wheat beer.

While online brokers had been selling stock over the Internet for some time, Klein, 38, bypassed traditional investment banks to appeal directly to qualified investors. And with thousands of entrepreneurs asking him how to raise capital the same way for their own companies, he launched Wit Capital (wit is the Flemish word for wheat), an online investment bank and brokerage firm that grooms companies for IPOs to the firm's member investors.

Most of those who followed Klein's lead were not nearly as successful. "We raised capital because we were first and got lots of media attention," Klein says. "Since then, most companies that have gone online and tried what we did have failed."

And in cyberspace, with the inherent potential for fraud, even modest bids for capital, such as private placement opportunities, have no guarantee of success. "There are real risks in investing online without an investment bank," Klein says. "If there's no intermediary, you're taking the company's word for [its success]."

ONLINE OBSTACLES

Consider the experience of Debra Cox, 42, who three years ago launched BR Logos & More, a retail store in St. Augustine, Florida, which manufactures embroidery, heat transfer and graphic art products She s looking for $275,000 to purchase additional machinery and place her products with mass marketers. "I've been to every bank in St. John's County, plus the SBA," Cox says. "If you don't own real estate, they don't want to talk to you."

Last June, Cox posted a description of her business and financing needs on www.financehub.com, one of more than a dozen Web sites designed to connect entrepreneurs to venture capital. She's also been researching venture capital firms online and sending e-mail memos to those that look promising. So far, her only response has been a request for more information from a West Coast firm that arranges financing. "I'm not very optimistic, but I'm going to keep trying," she says. "I'll probably have a better chance going this way than through any local bank."

Can you find venture capital online? "Absolutely not," says Sidney Williams Jr., principal partner with Axia Partners LLC, a venture capital firm in New York City. "What you can do is open a dialogue." Williams advocates using the Internet for thorough research so you can make informed contacts with promising firms and begin building relationships. Then, when you do send a business plan or prospectus, you're not a stranger.

Terry Bibbens, the former owner (now retired) of a computer simulation company who now serves as entrepreneur in residence at the SBA's Office of Advocacy in Washington, DC, agrees. "Entrepreneurs should be thinking of the Internet not as a way to have a check show up magically at your door from someone you don't know," he says, "but as a way of getting information about your company in front of people in a position to help."

That's what worked for an online shopping and information center about the independent film industry called Independentfilms.com Inc. Launched last June, the company is growing rapidly because it owns several valuable domain names that allow it to dominate Internet traffic regarding independent films.

Co-founder Tom DeLuca, 31, needed $500,000 to launch a product division that would sell films online. He posted information about the company on a venture capital Web site, but his most valuable contact came from a film producer who had visited the company's site.

After the producer expressed interest, DeLuca perused the producer's Web site, then set up a meeting. They are now close to closing a deal that will provide the needed funding. "You never know who's going to visit your site," DeLuca says.

This story illustrates the general principle that the businesses most likely to succeed in raising money online are those appealing to a built-in market. An Internet business, for example, can offer its own customers a chance to invest in the company, just as Ben & Jerry's Homemade Inc. once raised money by inviting inquiries on its ice cream cartons. Likewise, potential investors who surf the Web are more likely interested in a software, Internet or other high-tech company than any other type of business.

THE CAPITAL GAME

Traditional investment banks usually aren't interested in early-stage financing because of the risk of loss. Increasingly, venture capital firms are becoming just as difficult to tap. According to the SBA, venture capital firms invest approximately $10 billion annually, but they fund fewer than 2,000 ventures per year - each needing $5 million or more. "If you're a really small company looking to raise a million or two, you have just as much chance of winning the lottery as getting venture capital," Bibbens says.