When dollars need a home - advice for venture capitalists about investing in small-to-medium sized firms

Nation's Business, Dec, 1996 by Michael Barrier

Experts answer our readers' questions about starting and running their businesses.

I am a wealthy private investor looking for established and profitable small to medium-sized niche manufacturing companies--$10 million to $60 million in annual sales--with which I can partner in hopes of generating growth in their business and my capital. I would like to find companies where some or all of the executives are willing to invest some of their personal money as well. Are there sources or databases of such companies that are seeking private capital or have shareholders who wish to gain liquidity for all or a portion of their ownership?

J.M.J., Chattanooga, Tenn.

Your question touches on a continuing problem: how to match relatively small investors---"angels," they're frequently called--with small companies that would welcome their help.

"Typically," says Jeff Sohl, director of the Center for Venture Research, at the University of New Hampshire, "high-networth investors run in the same crowds, so it's easy for them to find each other" through informal networking; and they can lead each other to investment opportunities.

Slightly more formal are investment clubs whose members screen entrepreneurs who are seeking funding; these investors sometimes invest together.

The third avenue consists of computerized "angel networks" that match entrepreneurs with private investors. The first such network, the Venture Capital Network, was formed in 1979 at the University of New Hampshire. It's now at the Massachusetts Institute of Technology and is called the Technology Capital Network (290 Main St., Cambridge, Mass. 02142; 617-253-7163). Sohl says perhaps a dozen other matchmaking networks have sprung up, mainly on the East and West coasts. In an "angel network," investors state their investment criteria or preferences certain industries, for example, or companies at a particular growth stage--and certify that they meet the networks standard for investors; entrepreneurs summarize their business plans and financial data.

The network searches its database for a good fit and sends information to the investors whose criteria match what the Technology Capital Network calls "the opportunity profile." When an investor is interested, the network arranges an introduction, but both sides remain anonymous until then. The MIT network and those like it are nonprofit and charge a fiat fee rather than a commission.

Despite the protection offered by the networks' pervasive anonymity, there is a drawback, says Sandra Nola, associate director of the Dingman Center for Entrepreneurship, at the University of Maryland. She points out that "angels" who might be interested in going in together to invest in a company can't do so if they aren't aware of one another's interest. A company whose needs are too great for one "angel" to meet but are within the reach of several thus might be deprived of funding that should be readily available.