Capital Raising: Online Matching

Online Matching is now a very popular way for capital raising in Canada and the United States ‘” it can help you to find investors that traditional ways can not find sometimes.

The Internet promises to open new vistas in the bargain-demolishing old and inefficient ways of doing business that historically have excluded little guys from seeking capital. Its charms were, therefore, apparent to those who had been appalled at the inefficiency of the private markets at the early stage. The result has been a spurt in the number of so-called matching services.

The more prominent matching services are, as one can imagine, the ones that use the Internet as their medium of exchange, either in whole or in part. Unfortunately, no authoritative list of matching services exists.

A variety of matching services currently offer their services online. More are springing up (and more are disappearing, for that matter) with each passing day. But, before discovering who all these services are, and how to contact them to get your piece of the capital pie, first take a look at what online matching services can do for you.

Garage Technology Ventures (www.garage.com) ‘” founded by Guy Kawasaki of Apple Computer fame ‘” is perhaps the most well-known of this crop of online matching services.

The services it offers to the companies that it works with are quite extensive, and they’re indicative of the kinds of services that other online matching services offer. They provide

  • Access to capital. Garage Technology Ventures matches mostly angel investors with high-tech start-ups looking for initial financing in the range of $2 million to $5 million.
  • Strategic and operational guidance. Garage Technology Ventures helps companies refine their business plans and recruit talented executives and technical help. Garage Technology Ventures also provides referrals to experienced professional advisors such as lawyers and accountants.
  • Training in making effective pitches. Garage Technology Ventures teaches its clients how to make effective pitches to potential investors, and how best to communicate their investment opportunities.
  • Marketing and public relations advice. Garage Technology Ventures works closely with its clients to create effective marketing strategies and comprehensive public relations campaigns ‘” the kind that attract investors and their capital.
  • Forums. Garage Technology Ventures sponsors forums at which companies and investors can meet offline ‘” face-to-face ‘” to get to know one another and trade information about business opportunities. Events such as showcase breakfasts enable member companies to pitch their businesses to a variety of venture capital, corporate, and angel

Keep in mind that each online matching service varies in the services that it offers to firms seeking capital and in the clients that it serves. Before you settle on one particular matching service, be sure to check out several to see which can best meet your needs.

Just like almost everything else in life and in business, the world of online matching services has its good and bad points. Be sure to give serious consideration to both before you dive in.

Good news: The good news, of course, is obvious. If the matching service model works, either as it currently is formulated or as it morphs with a changing economy, based on practical experience, the activity at this critical stage in the emerging growth/entrepreneurial sector will necessarily increase and, it is hoped, prosper. Good deals will get done, bad deals will lose their allure, and the economy of this country will be significantly advantaged.

Bad news: Several of the services that came into being on the theory of matching angels with entrepreneurs have, either by accident or design, climbed up the food chain, so to speak, and are posting deals that are now more VC-versus-angel oriented.

Really bad news: The competitive risk of posting one’s business plan online is another problem area. It may be ‘” despite diligent efforts to preserve confidentiality ‘” that the audience for your business plan is comprised of would-be competitors or customers and vendors who want to learn something more about your company than you want to discharge.

Some matching services, that is, those that haven’t registered as broker/dealers under the 1934 Act, are in for a surprise if they elect to charge success or placement fees. It won’t be long, we predict, before unregistered sites must either close down or suspend operations (at least the fee generation portion thereof) until the necessary licenses have been obtained. And if you’ve affiliated with such a matching service, not only are you likely lose the financing you seek, but you may well lose any fees you’ve paid. That isn’t exactly our idea of a win-win opportunity.

Increasingly, some matching services mimic the venture capital industry'”segueing from early-to later-stage investments. Garage Technology Ventures, for example, suggests that the majority of the investors favoring the deals on its site are institutions. OffroadCapital.com, an online matching service that went out of business in 2001, had a threshold that was well above the traditional angel sector. Such sites resemble investment and merchant banks, much like Wit Capital, doing conventional private equity financings of institutional caliber but using the Internet as the medium for propagating the opportunity.

These organizations typically are registered as broker/dealers under the Securities & Exchange Act of 1934, and they charge fees that mimic those of conventional mainstream placement agents ‘” with the added element, in many cases, of a fee charged to the investor and to the company. Moreover, in those instances where the matching service admits entrepreneurs of less-than-institutional grade (institutional grade in this case meaning companies that are ripe for a Series A round of venture capital investment), the screening is rigorous. Garage Technology Ventures screens literally thousands of deals for each one it agrees to post, a result of the fact that its intake mechanism (the Internet) is so broad-based.

When the Internet is involved, the issue is slippery. The slipperiness stems from the ancient legal rule that to qualify as a private offering, the placement must entail neither general advertising nor general solicitation. Obviously, any transaction posted on the Internet involves general solicitation ‘” solicitation of the entire wired world, in fact. Realizing this and reacting to a series of industry proposals, the SEC has adapted some of its pre-existing doctrine.

  • First, all investors must be prequalified by the matching service by filling out a questionnaire confirming, among other things, that he or she is accredited .
  • Second, any online posting must be password-protected so that only specified individuals have access to the deals. That mitigates, at least to some extent, the inherent element of general solicitation.
  • Finally, angels admitted with the appropriate password to the magic circle must not invest for a period of 30 days in any posted deal.

If the letter and the spirit of these rules are followed, then a matching service can use online technology to spread the word, so to speak.

The danger, of course, is that promoters addicted to sharp practices (or so-called penny stock fraud), boiler rooms, and bucket shops will use the Internet not only to push questionable publicly traded securities but also private offerings. If that turns into a widespread problem, then you can expect action from the SEC. For the moment, however, if the rules are followed, online matching services are protected from any allegation that they’re engaging in offerings that need to be publicly registered.