A Perfect Match?
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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."
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."
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.