Ace In The Hole

A new online network could unleash a tidal wave of private capital for entrepreneurs.

Magazine Contributor

May 1, 1997 7 min read

This story appears in the May 1997 issue of . Subscribe »

To understand just how fertile the electronics business is, consider the heritage of Ed Meltzer. His parents' TV and radio repair shop, started in 1959 in Kansas City, today is not only a thriving systems integrator but has also given birth to another high-tech venture, Intelligent Wireless Systems Inc., of which Meltzer is president and CEO.

The Prairie Village, Kansas, company designs, develops, manufactures and markets proprietary wireless transceivers for the automation and control industries. For instance, the company's Automated Vehicle Locating and Information System (AVLIS), designed and manufactured for the Kansas City Area Transportation Authority, provides the transit company with up-to-the-minute information about how effectively the fleet is serving transit riders at any given moment. "The system saves them money," Meltzer says.

The evolution of the Meltzers' company--from a mom and pop enterprise serving a neighborhood to a high-tech company developing products with global applications--mirrors the changes in the American business scene at large. Although this change has been for the better, it has also created fundamental shifts in how businesses are financed. While his parents could throw their savings into opening a storefront business and, through diligent reinvestment of profits, create a prosperous family enterprise, Meltzer cannot.

Why? Because like most technology-driven companies, he must pour a fortune into research and development, and then chase down vast new technology-driven markets that materialize quickly and grow exponentially. Under this regime, the old model of reinvesting profits just doesn't work. Today, the opportunities facing many companies demand large quantities of patient, permanent equity capital upfront. For Meltzer, this upfront requirement was nearly $1 million.

In July 1996, Meltzer put together a Small Company Offering Registration (SCOR) deal for $945,000; it was approved for sale in Kansas and Missouri that fall. Meltzer hoped to close the deal by year-end, or at least reach a minimum of $671,000 in investments. But as of February 1997, his commitments totaled just $400,000.

Is something wrong with Meltzer, Intelligent Wireless or the deal? None of the above. The problem is that while the company is on the cutting edge of technology, Meltzer must contend with arcane ways of raising capital that, in the context of today's rapid pace, seem to take forever.

Specifically, Meltzer, like thousands of entrepreneurs before him and thousands more to follow, must slowly, methodically and exhaustively beat the bushes for investors. Then he must physically get himself in front of each one, make the pitch, and follow up until the check is in the mail. "To get the $400,000 committed so far," says Meltzer, "we went through about 100 investors." To get the second half of the deal done, Meltzer estimates he'll go through another 100 or so. Oy vay!

Happily, there's a better way, and Meltzer plans to take advantage of it. It's called ACE-Net, which stands for the Angel Capital Electronic Network. ACE-Net is a project sponsored by the Small Business Administration (SBA); after years of public policy debating, lobbying, and nurturing at universities and economic development organizations, the system became operational last year.

According to Terry Bibbens, entrepreneur in residence at the SBA Office of Advocacy and one of the program's many architects, ACE-Net is "an Internet-based network that provides new options to small companies looking for capital and new opportunities to so-called `accredited investors' looking for investment opportunities." Bibbens says ACE-Net removes many of the limitations entrepreneurs traditionally face when trying to link up with angels (wealthy investors) on a nationwide basis.

Nuts And Bolts

Listings of stock offerings on ACE-Net are found through an online search engine that permits investors to find the type of company, technology, investment size or geography they are looking for. Once the information is found, the investor can review or download the forms filed by the listed companies. If the investor wishes to purchase stock, he or she can then contact the company directly.

According to Bibbens, companies that want to be listed on ACE-Net must go through one of several nodes, or network operators. Eight initial nodes have been designated; as of the first quarter of 1997, four were operational, with others scheduled to be online this month. The four operational nodes are the Technology Capital Network at Massachusetts Institute of Technology in Boston; The Capital Network Inc. in Austin, Texas; Accelerate at the University of California, Irvine; and Advance Technology Development Center at the Georgia Institute of Technology in Atlanta.

As for the investors, access is limited to accredited investors--defined by the Securities and Exchange Commission as, among other things, individuals who have a net worth or joint net worth with a spouse in excess of $1 million, or have net income in excess of $200,000 or joint income with a spouse in excess of $300,000 in each of the last two years and expect similar income in the current year.

Limiting access to accredited investors offers participating entrepreneurs a real advantage, says Bibbens, because it puts them in touch with individuals who have not only the interest but also the financial wherewithal to invest in their companies.

Indeed, ACE-Net is no mere electronic coffeeklatsch. ACE-Net listings consist of actual offerings that are exempt from federal registration under Regulation A or Regulation D. In other words, to be listed on ACE-Net, a company must be doing a Reg A or Reg D deal, not simply shopping a business plan. In addition, the form (U-7) used to file for a listing on ACE-Net is a SCOR form. Filling out a SCOR form is no walk in the park. Says Bibbens, "Entrepreneurs should not attempt to use this avenue without a securities attorney."

Big Business

The importance of ACE-Net cannot be underestimated. Bibbens says the most popular estimate of the amount of equity capital America's emerging new enterprises need is on the order of $60 billion each year. While angels are capable of making a sizable dent in this need, time and place constraints such as those faced by Meltzer, to say nothing of the regulatory barriers, have until now kept entrepreneurs
from easily tapping angels' resources.

The reason for the problem comes down to just one word: efficiency. Among brokers, traders and professional investors, this term has a precise meaning. Specifically, it refers to the speed and proficiency with which information is disseminated. The more efficient a market is, the theory goes, the more buyers and sellers are attracted to it because they can make investment decisions based on knowledge of all relevant facts that are available.

Under this definition, it's also easy to see just how inefficient the market is for private capital. Distributing information among private investors is difficult. There's no uniformity. Buyers and sellers have wildly diverse agendas.

And this is precisely where ACE-Net can make such a fundamentally important mark: It dramatically increases the efficiency of information distribution. In fact, within the strictest constructs of the discipline, ACE-Net mirrors the mechanisms of any stock market by matching buyers and sellers with uniform information. When this happens, capital flows more freely.

For entrepreneurs like Ed Meltzer, that's certainly the expectation: "My hope is that 30 days after going up on ACE-Net we will be fully funded."

For more information on ACE-Net, visit (http://www.sbaonline.sba.gov) or (http://ace-net.unh.edu)., or contact Jere Glover, Chief Counsel of the SBA's Office of Advocacy, at (202) 205-6533 or (202) 205-6928 (fax).