Surf the Web for business financing yields thousands of sources: banks, brokers, consultants and venture capitalists, to name a few. While some names are immediately recognizable and radiate integrity, most aren't--and don't. Yet the semblance of sophistication combined with ease lure unsuspecting entrepreneurs into deals that often prove costly.
"Internet financing is fraught with scams," asserts Massoud Entekhabi, a partner in the PricewaterhouseCoopers Global Technology Group in Woodland Hills, California. "A simple search produces numerous accounts of rip-offs. And the SEC [Securities and Exchange Commission] is taking an aggressive stand to combat fraud on the Net." (See last month's "Money" column for more details.)
"Many are using the Web to make quick money off small businesses," Entekhabi warns. "The Internet allows them to create a sophisticated persona that enhances an entrepreneur's comfort level. You can go to a Web site that looks very professional and prestigious, but in reality, you have no idea whom you're dealing with."
Entekhabi says he's seen clients "ready to sign deals with money sources demanding 16 percent of funds raised, $25,000 in advance for nonaccountable costs, plus warrants [guaranteeing the right to buy stock in the company at a set price]. That's a good deal for somebody--but not for the entrepreneur."
Not all online financing offers are fraudulent, of course. "Some sites are pretty good," Entekhabi acknowledges, "such as the SBA's ACE-Net site http://www.sbaonline.sba.gov/ADVO/acenet.html, designed to match entrepreneurs with investors. There are a variety of other angel sites and introductory pages. Most venture capital firms have decent sites that can be found through search engines just by entering `venture capital.' "
How to sort the good from the bad? Make it a point to know exactly whom you're dealing with, Entekhabi advises. "Look for firms that describe their funds, detail the types of investments they make, and maybe even disclose the companies in their portfolios so you can see if your type of business is compatible with their investment interests," he says.
Still, Entekhabi concludes, "Nothing beats a good personal introduction. [Lenders and investors] like referrals from people they know and respect. Referrals act as a first-stage filter for [both parties], and provide the business owner with a more targeted introduction. It's a more efficient process all around." Try your lawyer, banker, accountant, other entrepreneurs who have been financed by funds, banks, angels or venture capitalists for referrals.
It's not necessary to avoid the Net as a vehicle for identifying potential funding sources. But, as with any financial matter, be cautious. Investigate all deals carefully, and don't do anything before consulting your attorney or CPA.
Paul De Ceglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker.