Small Firms to Be Touched by Angels

California will be among the first states to participate in online venture capitalism, via a federally sponsored Internet service that matches small entrepreneurs with investors.

By January, the state is expected to fully hook into Angel Capital Electronic Network, or ACE-Net, developed by the Small Business Administration.

The “angels” in the service’s name refer to self-made individuals with high net worth who finance small companies in return for stock or ownership. Typically, angels are successful, savvy business owners who seek to invest in fledgling companies in their own industries.

“Venture capitalists do business the way they did it 20 years ago,” said Jere Glover, chief counsel for the SBA’s Office of Advocacy. “They look at every deal from scratch.”

To speed up the deal-making and reach out to a wider range of investors and companies, the SBA created ACE-Net, a computerized listing of business deals or offerings that can be searched by angels nationwide, Glover said. California joins Texas and Massachusetts as the first states to sign on to the service.

Each year, about 250,000 angels invest $20 billion in 30,000 small companies nationwide. That’s far short of the $60 billion needed by more than 356,000 companies, according to the SBA, which estimates 2 million prospective angels exist.

About two-thirds of angel money goes to firms in biotechnology, communications, consumer products, health care, computer software and information technology.

ACE-Net, which received approval earlier this month from the California Department of Corporations, is designed to help small companies find those investors. Small companies often manage to find sums of less than $1 million to start up their businesses, Glover said. But when they want to expand, they often need amounts that are too small to interest venture capital firms, whose deals average $6.8 million each. ACE-Net would be designed for deals in the $250,000 to $5-million range.

Here’s how ACE-Net would work:

Eight sites throughout the nation will screen potential investors and small businesses for the service.

Investors must have a net worth of $1 million, excluding their residence, or annual incomes of more than $200,000, said Tiffany Haugen, director of Accelerate Technology Small Business Development Center. The nonprofit center, affiliated with UC Irvine, is one of the eight sites.

Investors will be able to search the listings for small companies by categories such as type of company, investment size, geographic location or minority or female ownership. Investor identities and net worth will not be revealed except to the companies they decide to approach, she said.

In California, companies seeking investors must register their offerings with the state, unless they qualify for a federal exemption, said William Kenefick, assistant commissioner of the state Department of Corporations.

Deals will be worked out between investors and companies, but the SBA is developing a standardized form that can be used to save preparation time and money.

“We tell talented high school basketball players that the odds are 10,000 to 1 they’ll make it into the NBA,” Glover said, “but the odds are even worse for a small business getting venture capital.”

But with ACE-Net, he said, small companies for the first time will use the Internet to raise money across state lines.

Details about ACE-Net are on the Internet at https://www.sbaonline.sba.gov, https://acenet.unh.edu or https://accelerate.uci.edu