Traditional investment banks usually aren't interested in early-stage financing because of the risk of loss. Increasingly, venture capital firms are becoming just as difficult to tap. According to the SBA, venture capital firms invest approximately $10 billion annually, but they fund fewer than 2,000 ventures per year-each needing $5 million or more. "If you're a really small company looking to raise a million or two, you have just as much chance of winning the lottery as getting venture capital," Bibbens says.
A better hope would be hooking up with an angel investor, one of the more than 250,000 wealthy individuals who together invest between $20 billion and $30 billion each year in high-growth companies that each need between $250,000 and $5 million. The SBA reports that 30,000 such companies are funded each year by angels, who typically lend their business acumen along with their money to help ensure the venture's success. Rather than expecting to take the company public and then get out within a few years, angel investors expect to be involved for five to 10 years or longer.
But how can entrepreneurs get hooked up with that kind of investor? That's where the Internet comes in. The SBA's ACE-Net (Angel Capital Electronic Network) site, http://www.ace-net.org , attempts to match entrepreneurs with angel investors. Other Web sites also make the effort, allowing business owners to post descriptions of their businesses and search for potential investors. Unfortunately, the approach hasn't worked very well yet. "I've never met anyone who's succeeded in getting capital [through an angel network]," Klein says.
One reason is that people serious about investing venture capital don't tend to browse through Web site postings because they get an abundance of prospects contacting them directly. "We don't look at those postings because we don't think quality entrepreneurs would post their business plan on a Web site," says Ann Winblad, principle partner with Hummer Winblad Venture Partners in San Francisco. "The selection of an investment partner should be a careful process, not a 'come one, come all' offer."
Postings, however, do tend to garner responses from intermediary firms that can help you get your business plan in shape and provide access to possible investors-for a fee, of course. Axia Partners' Williams visits entrepreneur bulletin boards and chat rooms to invite people to look at his firm's Web site (http://www.axiapartners.com) and consider engaging the firm to locate angel investors. "You pay us to be your devil's advocate, to help you get your plan in shape and look at the competition," he says.
The Internet provides other tools to help entrepreneurs in their search for capital. Take basic research, for example. Numerous Web sites provide background articles that can help you get up to speed on the world of venture capital. One good site is http://www.capitalventure.com , which includes a glossary found under "Private Equity 10l." There's more information at http://www.vcapital.com and http://www.financehub.com These sites include links to specific venture capital firms for more focused research.
Venture capital firms' Web sites are also great sources of information that can help you pinpoint what the firms are looking for, so you don't waste your time and theirs barking up the wrong tree. "I'm amazed at how many entrepreneurs don't go to our Web site before contacting us," Winblad says. "They'll send a business plan for a hardware company. If they'd looked at the site, they'd know we only fund software and Internet ventures."
Once you've targeted the appropriate firms, don't start by mailing a business plan, Winblad advises. "The mailed-in proposal is dead on arrival," she says. "I won't lug them home to read them."
Instead, she advises entrepreneurs to send a brief e-mail in hopes of starting an electronic dialogue about the business. "I think entrepreneurs are always amazed that I answer my own e-mail," Winblad says. After initial messages, she might have them send a business plan electronically or suggest someone else who might be interested.