From the July 1998 issue of Entrepreneur

The power of the Internet to assist entrepreneurs in raising capital is eclipsed perhaps only by the misconceptions surrounding this technology. Precisely what is achievable? What are the real pitfalls, and what are the real opportunities?

To get to the heart of the matter, we spoke with two entrepreneurs on the leading edge of Internet-based corporate finance. Clay Womack, who founded Direct Stock Market Inc. in 1993--nearly ancient times in this context--says his Santa Monica, California, firm connects investors to early-stage investment opportunities over the Internet. In 1996, Mark S. Perlmutter founded Direct IPO Inc., a Marina Del Rey, California, company that is affiliated with a brokerage firm and brings pre-IPO (initial public offering) private deals to investors on the Web. Both men gave us their frank assessments about the state of the Internet as it relates to raising money for capital-hungry entrepreneurs.

Entrepreneur: So is it possible today to raise money over the Internet?

Mark S. Perlmutter: It's possible, but I don't know anyone who's done it. What people have done is posted deals on the Web, then followed up and closed the deal with online lead-generation. What I think will be possible is that you'll e-mail 1 million investor members of an organization such as ours, and of that, 1 percent will respond, and of that number, another 1 percent will actually invest. But we're not there yet. Nobody is.

Clay Womack: Yes, you can, but you cannot rely on the Internet as your sole source of fund-raising. The way we view it is that the Internet is a very cost-effective component of an overall stock marketing program.

Entrepreneur: Why can't you put your deal up on the Web and simply wait for the checks to come in?

Womack: Historically, stocks have been bought, not sold. But that's changing. More and more investors are making their own investment decisions, seeking out opportunities on their own, and looking to the Internet for these opportunities.

Perlmutter: The fact is, people make investments in companies where there is some sort of relationship. And on the Internet today, there is no one person or group that has brought a string of deals to the market that has created a loyal following of, say, 1 million investors who will come back to the well for the next deal. Our plan is that by 1999, we will have completed 10 deals and will have a loyal following of investors who look at each one of our deals.

Entrepreneur: So at what stage of development is the Internet in its ability to help entrepreneurs raise money?

Womack: It's in its infancy. I think there were a lot of unrealistic expectations that people would buy stuff on the Internet overnight. It will take some time to educate individual investors.

Entrepreneur: How will this education take place?

Womack: Individual investors will start reading about more and more high-profile companies that have raised money on the Web. They will, just like the large insurance companies and pension funds that invest in venture capital partnerships, start to see investments in smaller companies as a strategic component of their total investment portfolio. This interest will lead them to sites such as ours.

Entrepreneur: Well, if the Internet is in its infancy, what is the advanced state going to be like?

Womack: We believe there's a critical mass of investors who want to be venture capitalists. Once an organization such as ours has a critical mass of 50,000 to 60,000 investors, then you'll be able to see the potential of a very sexy offering coming online and getting sold out in a few weeks. Our goal is to have 35,000 to 40,000 of these investors by the end of the year.

Entrepreneur: What kinds of investors are on the Web now looking to invest in companies?

Perlmutter: There are basically two major types of investors on the Internet whom our company deals with. First, there are foreigners. The Internet appeals to them because in places such as Japan and Germany, there simply isn't the kind of deal flow that there is here in the United States.

Then there are what I call Internet-savvy employees. These are people who work at well-established technology companies, and in their jobs, they work with emerging Internet businesses they'd like to have a chance to invest in because they understand the potential of these businesses.

Entrepreneur: If someone has tried to raise money using conventional techniques and has failed, should they try again using the Internet?

Perlmutter: The first part of the answer is that bad deals are bad deals, and one isn't going to happen just because it's accessible to investors on the Internet. But the second part of the answer is that, right now, the serious investors on the Internet are looking for Internet and technology deals in which there is an IPO on the horizon.

Womack: If by conventional methods you mean selling your company face-to-face to investors, I would say that if you didn't raise money that way, then the Internet is not going to improve your chances. On the other hand, I would say if you're not using the Internet, you're dating yourself. If you want to raise money, you need to be recognized as a forward thinker and as someone who will use all the tools available.

Entrepreneur: What will keep the Internet from reaching its potential as a capital-formation tool?

Womack: High-profile fraud could be a problem. That could cause a regulatory backlash. I sit on the Securities and Exchange Commission's (SEC's) Government/Business Forum on Small Business Capital Formation, and I can say the SEC is very much in tune with the needs of small business. Still, it has to balance that forward-thinking posture with being on the hot seat when an investor gets defrauded out of $100,000. As promising as the Internet is for raising capital, it also has the power to help defraud investors.

The real regulatory threat comes from the states. If you want to sell an offering in more than one state, you can get comments back from [different] state regulators that are diametrically opposed to one another. When that happens, it's very difficult to figure out what to do. The new coordinated review procedures for state and federal registration statements, which clear some types of offerings for an entire region of the country, is an important step forward, but there's more work to be done.

Entrepreneur: Bottom line, what's the benefit of the Internet today?

Womack: It's a time- and space-shrinker. The Internet is a powerful communications medium that can bring people together and decrease the cost of raising money. It also allows smaller investors to get in on opportunities once reserved only for institutional venture capital investors. Before the Internet came into play, the average direct public offering investor put about $2,400 into an offering. Today, the average is about $1,200. This means the Internet has brought a lot more investors to the table. For entrepreneurs looking for capital, this can only be good news.


David R. Evanson's newest book about raising capital is called Where to Go When the Bank Says No: Alternative Financing for Your Business (Bloomberg Press). The book is available in bookstores or by calling (800) 233-4830. Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public.

Next Step

Surf the Internet. There are thousands of finance-related Web sites. You might want to start with the two that were developed by the experts mentioned in this article. Direct IPO Inc. is at http://www.directipo.com Direct Stock Market Inc. is at http://www.dsm.com

Contact Sources

Direct IPO Inc., (310) 821-3639

Direct Stock Market Inc., (800) 350-7267.