Working the Web for New Capital
A host of legal and practical difficulties awaits the entrepreneur who wants to use the Web to search for outside capital--and if you want to know how to overcome them, listen to the story of Mason Conner.
Conner is president and chief executive of VillageFax.com of Tustin, a provider of Web-based business-to-business fax services to such big-name customers as the California State Automobile Assn., the Weather Channel, the public relations firm Hill & Knowlton and Catalog City. Last year he raised $2.3 million in a direct public offering of his company’s stock via the Web, and he did it the hard way.
Indeed, Conner had to overcome pretty much every obstacle that federal and state securities law can throw at you, he spent more money than he wanted to, and he probably worked as many hours on his deal as any chief executive doing a multimillion-dollar public offering, all without the big payoff. But he succeeded, and you can draw three lessons from his experience:
* It’s not easy to raise outside capital on the Web.
* Only the foolhardy try to go it alone.
* All that notwithstanding, it can be done.
As outlined in this space in recent weeks, the Web is fast becoming an important resource in the financial management of any small or mid-size company bent on growth. You can do your business banking on the Web, get a modest business loan, make a connection with a venture capitalist or private equity group, and get your business plan in front of an angel investor.
As Conner’s story shows, you can also do a direct public offering of your stock via the Web--in effect, your own mini-IPO--even if you start out with the cards stacked against you, as he did.
Conner was vice president of sales when VillageFax’s board of directors changed the company’s strategy in 1997. At the time a developer of fax server software, VillageFax began selling business-to-business faxing services to big-name corporate customers, in essence allowing them to outsource the handling of most of their fax traffic to suppliers and customers.
VillageFax needed capital to finance this change of strategy, so the board voted to raise $3.7 million in what the Securities and Exchange Commission calls a Regulation A stock offering. (See accompanying article for a discussion of this and two other ways by which you can raise capital with a small stock offering.)
VillageFax posted a brief description of its stock issue on the Web site of Direct Stock Market Inc. of Santa Monica, making it accessible to a database of some 2,000 investors. Direct Stock Market (https://www.dsm.com) is among a number of new Web sites seeking to help entrepreneurs raise capital with direct public offerings.
In the early going, however, the VillageFax offering got no takers.
Frustrated, the board elevated Conner to the post of chief executive in early 1999, in effect giving him responsibility for making the best of a bad situation: VillageFax’s effort to raise money via Regulation A was well underway and it was too late to change direction.
In plain English, this meant that Conner shouldered the difficulties facing any entrepreneur who tries to raise capital on the Web. You can’t just post your need for capital on one or another Web site and hope that some deep-pockets investor will chance on it and mail you a check. Instead, you have to market your plan just the way you market your product or service, understanding that the Web is only one tool among many and that it will take real work to get the job done. And you must do all this in accordance with complex securities laws at both the federal and state levels.
“We needed to get our proposal in front of people who understood our business model,” Conner said. “We needed eyeballs, and we realized that we had to reach out and find them--and that just posting our offering on the Web wouldn’t do it.”
In an effort to give VillageFax credibility with potential investors, Conner established a board of advisors and recruited people with solid track records in the communications industry to serve on it. He also detailed a plan to identify likely investors and seek ways to get his plan in front of them using the resources of the Web.
That done, Conner set in motion a marketing and public relations plan to get his company and its offering mentioned repeatedly on a number of Web sites frequented by investors, including sites operated by Bloomberg, Yahoo and Microsoft. Conner also videotaped a “virtual roadshow”--a presentation detailing VillageFax’s offer archived by Direct Stock Market and made accessible electronically to investors in its database.
Last but certainly not least, Conner created a sense of urgency to the offering by increasing the minimum investment incrementally, from $1,000 to $5,000 to $10,000 and by making sure that the news of each increase made it onto as many investor Web sites as possible.
The result?
Within 90 days Conner raised $2.3 million from some 350 private investors--less than the $3.7 million originally targeted by his board, but an impressive number even so. The financing effort cost $140,000, or about 6% of the total raised, and the capital enabled VillageFax to expand its customer base, increase its traffic-carrying capacity, bring some redundancy into its computer infrastructure, and position itself for another round of financing sometime this year--perhaps $10 million from institutional investors.
Ultimately, in other words, the campaign was a success, especially when you consider the technical and legal difficulties of a Regulation A offering. But it took some doing.
“We had inquiries from people in other states with whom we couldn’t even discuss the offering because of their states’ ‘blue sky’ laws,” Conner said, referring to laws governing the offering of corporate securities. “The regulatory process you go through with an offering of this nature is as arduous as a regular IPO, and you don’t get the reward of a big IPO.
“I inherited a project that was failing; my board said, ‘Here, you go do it,’ ” Conner continued. “I can’t endorse Regulation A as a simple vehicle for any company that wants to raise outside capital. But we needed capital to finance our growth curve--and we raised it.”
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Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
