A Perfect Match? If you think an intermediary service has the quick fix you need for finding investors, take a second look.

Entrepreneurs Ahmed and Reem Rahim recently took a significantfirst step in the half-million-dollar expansion of their organictea company, NumiTeas. The brother-and-sister team made their first-everfund-raising pitch to a group of potential investors at a venturefair in Oakland, California, in April.

Their funding search thus far had been limited to theevent's sponsor, a matchmaking service called Investors'Circle in Brookline, Massachusetts, that links sociallyresponsible companies with like-minded investors. Numi Teas, alsoin Oakland, California, was entering a critical growth phase in itsfour-year history when it enlisted the help of the intermediary tofind capital for a new product launch, expand its inventory, andtriple the size of its office and warehouse space. Because of theirstrong social component-not only is their tea organic and certifiedkosher, but they also outsource some of their tea packaging to anorganization that employs disabled adults-the Rahims consideredInvestors' Circle an obvious starting point after hearing aboutthe matchmaker from other entrepreneurs and their own financialadvisor. "We thought it would be a great fit to be a part ofan investors' [network] that was looking to support organic[products] and sustainability in the environment," explainsAhmed, 35.

The tea company, however, was just one of several at the fairvying for investment dollars. Months after their presentation, theRahims are still in close contact with some of the participatinginvestors, providing financial projections for their company(valued at close to $4 million for 2003), in hopes of brokering aneventual deal. "We know it takes time to build therelationships and [for investors] to get to know the company,"Ahmed concedes. "We didn't have any expectations that itwould happen overnight, but we're hoping that it will happen inthree to six months. But it could take a year or twoyears."

A Mixed Bag
Fortunately for the Rahims, they are braced for a potentiallydrawn-out and difficult investor search, in contrast to others whoare looking for a quick fix, often at any cost. A growing number ofcompanies looking for expansion capital in a hurry are usingintermediaries to identify potential investors. Althoughmatchmakers run the gamut from services that offer face time withinvestors to Web sites that post business plans for companiesseeking investment, many have one thing in common-they're notcheap. A broker may charge a $25,000 fee to locate investors, inaddition 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 someintermediaries can provide investor access and advice on importantissues, such as the size and direction of financing, others may bea waste of resources. An entrepreneur's success often hinges onthe finder's screening process. In other words, does theintermediary have a rigorous selection process, or does it takemoney from anyone regardless of funding prospects?

Despite the potential shortcomings, entrepreneurs tend to viewintermediaries as a useful way to find backers. Investors, on theother hand, prefer a professional referral to a paid matchmaker."Entrepreneurs have been told the only way to get a venturecapitalist's attention is through a personal referral.They've interpreted that to mean any referral, including a paidintermediary," says Dee Power, the co-author of InsideSecrets to Venture Capital (John Wiley & Sons) andAttracting Capital From Angels (John Wiley & Sons)."The venture capitalist is talking about an accountant, anattorney or respected businesspeople."

Venture capitalists suggest networking, attending venturecapital conferences and direct contact by the entrepreneur forthose who lack a referral contact, according to a recent studyconducted by Power. None of the venture capitalists in the studyproposed an online matching service. Using a searchable venturecapital database was seldom recommended, and introduction through apaid intermediary was rarely encouraged.

"Something that turns us off is if the intermediarycontacts us and says 'Hey, I have this great [entrepreneur],and you need to meet him,'" says Dennis Spice, foundingpartner 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 guaranteethat we won't look at that plan."

GreatExpectations
Entrepreneurs are drawn to intermediaries for a couple of reasons.For starters, entrepreneurs have to stay positive throughout thearduous fund-raising process, and having an investor liaison canhelp cushion them from negative blows, says Power. "Also,raising capital can be a full-time job. [Entrepreneurs] believethere's some magic conduit to the money, and that theintermediary has that conduit."

In reality, most entrepreneurs fail to attract investment, nomatter how good their industry connections, because their businessplan simply isn't palatable or their lack of CEO experience isa turnoff. "Those businesses are not going to be successfulunder just about any circumstances in attracting an investor,"she says, "but they sign up for the [matching] serviceanyway."

Matchmakers, in turn, have to be careful not to give false hope,says Woody Tasch, chairman of Investors' Circle. "Everyentrepreneur thinks his or her business is the most compellingthing in the world and that people should be beating down theirdoors to invest," he explains. "We try carefully to say,'It could be nothing; it could be $5 million. The odds aregreater it will be nothing than it will be $5million.'"

His organization has a "very gentle" screening processto ensure entrepreneurs meet social and environmental criteria andto check for financial quality. About half are screened out at thisstage; the remaining ones submit executive summaries. From those,members select companies to present at investor events, whereentrepreneurs 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 theworld. It's an open investment platform and an open investmentmarketplace."

If you want to try an online matchmaker, investigate whether ithas a wide range of investors interested in many business types andindustries, says Power. Additionally, the service should notify aninvestor when a company matches its parameters "rather thanjust slapping the business plan on its Web site," Power says.She knows of one Web site that uses public records to identifyhigh-net-worth individuals who qualify as accredited investorsbased on home values. "It could be your grandmother,"Power says. "That's the wrong kind of service to goto."

An intermediary's track record is also crucial, says Seattleattorney Robert Seidel, a partner at law firm Cairncross &Hempelmann. Obtain a list of clients to assess recent successesand failures. "You're going to write them a check at theoutset without any assurance, so you need to do your best to findsomeone who has the best chance of succeeding," he urges.

And be wary of long-term exclusive relationships. "Therecan be nasty situations where intermediaries and companies signcontracts for a significant period where the intermediary will getpaid for any financing raised," Seidel emphasizes, "andit doesn't matter if they identified the investor ornot."

Crystal Detamore-Rodman is a Charlottesville, Virginia,writer who covers the small-business finance market.