Photo Finish

Entrepreneur, August, 2000 by David R. Evanson, Art Beroff

To be leader of the pack in any tech niche, you'll need fast cash, Investors are up to the challenge...if you are.

Demons haunt Gerard Powell late at night.

He wakes up, and there is only one thing on his mind: speed. "How do I raise capital faster and assure our dominance in the Internet niche we've pioneered?" he wonders.

Not that Powell hasn't been moving at warp speed already. He founded his Stroudsburg, Pennsylvania-based Cooperative Images Inc. in 1997 as a marketing service for physicians. The business was wonderfully simple: provide physicians with a stream of referrals for elective surgical procedures--mainly cosmetic surgery--in exchange for monthly retainers. Powell's firm would even finance patients, earning a substantial revenue stream on the back end.

By late 1998, Powell saw the writing on the wall--and with it, the place where real opportunity lay--so he went about reinventing the business as www.thatlook.com. He took the company public with a reverse merger, then raised $1 million to help finance the business' Internet transition.

Strategically, the new business model made sense. Internet-based promotion and lead generation was dramatically less-expensive than the cable TV ads that Cooperative Images had used. As a result, cost per lead and cost per referral, both key indicators of profitability, plummeted. And by applying a bottom-up management approach--focusing on profits and cash flow as opposed to top-line revenues--Powell is looking at a profitable $5 million in sales this year.

But Powell wants to get to $80 million in sales, fast. To reach his goal, he needs capital, and lots of it. "I estimate $8 million would be adequate to get the kind of sales force we need up and running, and to put the infrastructure behind them to support the new business they generate." Powell's paranoia, like that of every successful Internet entrepreneur, is that someone with more capital, business resources and employees will beat him to the punch.

Ergo, the demons. In fact, Powell's normally youthful 36-year-old face is getting so etched with worry lines, he wonders if the time might be right to consider a little of his own medicine--some cosmetic surgery.

LIFTED SPIRITS

Happily, because of a new breed of financier, Powell's worry lines may just melt away. Specifically, the guys with the checkbooks are getting faster on the draw. In what may be a vindication of oily Gordon Gekko's proclamation in the movie Wall Street, greed might indeed be good. After all, there's only one group that hates missing out on opportunities more than entrepreneurs: investors.

One of the firms leading the fast-cash revolution is New York City-based Yazam Inc., an investment-banking, business-development and venture capital company which funds companies within eight weeks of initial contact, or less if things go well. Phil Garfinkie, president of Yazam, knows just how important speed can be. He took a promising, new online photo-development technology from a standing start to a buyout by behemoth Eastman Kodak in the space of three years, earning himself and investors a huge payday in the process. "We succeeded because we had the capital at the point of opportunity," explains Garfinkle. "Where entrepreneurs can miss a major opportunity, especially today, is when they're out beating the bushes looking for investors when they really need to be developing technology and rolling out their product or service.

Here's how the process works under Yazam's so-called "Predictable Time to Money" model: Entrepreneurs submit their business plans to the company's Web site (www.yazam.com), where they're immediately evaluated by Yazam industry analysts and executive staff. "Immediately" is not a new term as it applies to raising money, but it's taken on new meaning as investors as well as entrepreneurs realize that fortunes are lost with a few days of inopportune dithering and indecision. Accordingly, within three weeks, entrepreneurs learn of Yazam's interest in accepting their plans and becoming a lead investor in their companies. If accepted, companies receive funding in about 45 days.

In the end, Yazam owns a piece of the company's equity, which it buys outright in the transaction. Yazam then gets another piece of equity, perhaps 2 to 10 percent more, for arranging the balance of the funding, and for accelerating the company's development.

A WHITER SHADE OF PALE

There are a couple noteworthy departures from traditional early-stage funding that account for the speed of Yazam and other investors. Typically, a venture capital firm with $500 million to invest may have only six people on staff, including secretaries. In contrast, Yazam, after just six months in business, has nine investment professionals, a research staff of 12 and a business development staff of nine. Says Garfinkle, "We can dramatically compress the time it takes to evaluate and structure a deal because we can throw more experts at the process."

A second major difference is that rather than investing capital from a single pool with uniform criteria, today's fast-moving investment companies lead a confederacy of investors with whom they have close relationships. In that sense, firms act like investment bankers in the rigid technical sense. "Obviously, you need to have relationships with a lot of investors to do this well," says Garfinkle. "[But] what also makes this possible is the ability to communicate rapidly and effectively over the Internet. A network of investors like ours was not possible five years ago."