Entrepreneurs Ahmed and Reem Rahim recently took a significant
first step in the half-million-dollar expansion of their organic
tea company, Numi
Teas. The brother-and-sister team made their first-ever
fund-raising pitch to a group of potential investors at a venture
fair in Oakland, California, in April.
Their funding search thus far had been limited to the
event's sponsor, a matchmaking service called Investors'
Circle in Brookline, Massachusetts, that links socially
responsible companies with like-minded investors. Numi Teas, also
in Oakland, California, was entering a critical growth phase in its
four-year history when it enlisted the help of the intermediary to
find capital for a new product launch, expand its inventory, and
triple the size of its office and warehouse space. Because of their
strong social component-not only is their tea organic and certified
kosher, but they also outsource some of their tea packaging to an
organization that employs disabled adults-the Rahims considered
Investors' Circle an obvious starting point after hearing about
the matchmaker from other entrepreneurs and their own financial
advisor. "We thought it would be a great fit to be a part of
an investors' [network] that was looking to support organic
[products] and sustainability in the environment," explains
Ahmed, 35.
The tea company, however, was just one of several at the fair
vying for investment dollars. Months after their presentation, the
Rahims are still in close contact with some of the participating
investors, providing financial projections for their company
(valued at close to $4 million for 2003), in hopes of brokering an
eventual deal. "We know it takes time to build the
relationships and [for investors] to get to know the company,"
Ahmed concedes. "We didn't have any expectations that it
would happen overnight, but we're hoping that it will happen in
three to six months. But it could take a year or two
years."
Content Continues Below
A Mixed Bag
Fortunately for the Rahims, they are braced for a potentially
drawn-out and difficult investor search, in contrast to others who
are looking for a quick fix, often at any cost. A growing number of
companies looking for expansion capital in a hurry are using
intermediaries to identify potential investors. Although
matchmakers run the gamut from services that offer face time with
investors to Web sites that post business plans for companies
seeking investment, many have one thing in common-they're not
cheap. A broker may charge a $25,000 fee to locate investors, in
addition to a percentage of the funds raised. Investors'
Circle, for one, charges $350 to circulate a business summary and
$400 to $800 to present at its venture fairs. While some
intermediaries can provide investor access and advice on important
issues, such as the size and direction of financing, others may be
a waste of resources. An entrepreneur's success often hinges on
the finder's screening process. In other words, does the
intermediary have a rigorous selection process, or does it take
money from anyone regardless of funding prospects?
Despite the potential shortcomings, entrepreneurs tend to view
intermediaries as a useful way to find backers. Investors, on the
other hand, prefer a professional referral to a paid matchmaker.
"Entrepreneurs have been told the only way to get a venture
capitalist's attention is through a personal referral.
They've interpreted that to mean any referral, including a paid
intermediary," says Dee Power, the co-author of Inside
Secrets to Venture Capital (John Wiley & Sons) and
Attracting Capital From Angels (John Wiley & Sons).
"The venture capitalist is talking about an accountant, an
attorney or respected businesspeople."
Venture capitalists suggest networking, attending venture
capital conferences and direct contact by the entrepreneur for
those who lack a referral contact, according to a recent study
conducted by Power. None of the venture capitalists in the study
proposed an online matching service. Using a searchable venture
capital database was seldom recommended, and introduction through a
paid intermediary was rarely encouraged.
"Something that turns us off is if the intermediary
contacts us and says 'Hey, I have this great [entrepreneur],
and you need to meet him,'" says Dennis Spice, founding
partner of Open Prairie Ventures in Champaign, Illinois.
"I'd rather the intermediary say [to the entrepreneur]
'Call Dennis Spice. He may be interested in your company.'
Putting a wall between me and the entrepreneur, I can guarantee
that we won't look at that plan."
Great
Expectations
Entrepreneurs are drawn to intermediaries for a couple of reasons.
For starters, entrepreneurs have to stay positive throughout the
arduous fund-raising process, and having an investor liaison can
help cushion them from negative blows, says Power. "Also,
raising capital can be a full-time job. [Entrepreneurs] believe
there's some magic conduit to the money, and that the
intermediary has that conduit."
In reality, most entrepreneurs fail to attract investment, no
matter how good their industry connections, because their business
plan simply isn't palatable or their lack of CEO experience is
a turnoff. "Those businesses are not going to be successful
under just about any circumstances in attracting an investor,"
she says, "but they sign up for the [matching] service
anyway."
Matchmakers, in turn, have to be careful not to give false hope,
says Woody Tasch, chairman of Investors' Circle. "Every
entrepreneur thinks his or her business is the most compelling
thing in the world and that people should be beating down their
doors to invest," he explains. "We try carefully to say,
'It could be nothing; it could be $5 million. The odds are
greater it will be nothing than it will be $5
million.'"
His organization has a "very gentle" screening process
to ensure entrepreneurs meet social and environmental criteria and
to check for financial quality. About half are screened out at this
stage; the remaining ones submit executive summaries. From those,
members select companies to present at investor events, where
entrepreneurs make a short presentation and interact with members.
"The baton gets tossed to the investors at that point,"
says Tasch. "It's not the most efficient process in the
world. It's an open investment platform and an open investment
marketplace."
If you want to try an online matchmaker, investigate whether it
has a wide range of investors interested in many business types and
industries, says Power. Additionally, the service should notify an
investor when a company matches its parameters "rather than
just slapping the business plan on its Web site," Power says.
She knows of one Web site that uses public records to identify
high-net-worth individuals who qualify as accredited investors
based on home values. "It could be your grandmother,"
Power says. "That's the wrong kind of service to go
to."
An intermediary's track record is also crucial, says Seattle
attorney Robert Seidel, a partner at law firm Cairncross &
Hempelmann. Obtain a list of clients to assess recent successes
and failures. "You're going to write them a check at the
outset without any assurance, so you need to do your best to find
someone who has the best chance of succeeding," he urges.
And be wary of long-term exclusive relationships. "There
can be nasty situations where intermediaries and companies sign
contracts for a significant period where the intermediary will get
paid for any financing raised," Seidel emphasizes, "and
it doesn't matter if they identified the investor or
not."
Crystal Detamore-Rodman is a Charlottesville, Virginia,
writer who covers the small-business finance market.