Building on a private equity model it barely resuscitated from dot-com era miscues, Advanced Equities Financial Corp. is bringing back a very dot-com era idea to serve a market that has been utterly reshaped by that crash. The company is expected on Thursday to launch a web-based portal to allow qualified investors to invest in late stage venture-backed startups.
Like many post-bubble plays, the company is leveraging the Internet as a distribution model for services that have proven demand, rather than simply aiming at the large number of eyeballs Internet exposure could draw in. It's model is more about filling a need for its core constituency than building a new one. The Chicago-based company is launching its Venture Gateway product as a way to offer transparency and secure communications to startup companies that in former days would have been likely initial public offering candidates, to raise mezzanine financing from individual investors and small institutions prior to going to the public markets.
The model is virtually the same as that of dot-com casualties including Offroad Capital, VCapital and Garage.com. However, rather than taking an investor-focused tack that positions the marketplace as a venue for wealthy investors to get in on hot private companies before they go public, Venture Gateway will enable startups and their venture capitalists to raise expansion capital cheaply and build a broader base of investors to support a more stable public offering later on. And while Advanced Equities hopes the portal will ultimately give the firm greater access to the worldwide market of approximately 100,000 individuals with assets of $30 million or more, it is fundamentally a way to more efficiently communicate deals to a base of 4,000 accredited investors who helped the firm raise $550 million in late stage capital for private companies last year.
Dwight Badger, Advanced Equities co-founder and CEO, said the firm was founded in 1999 to do early stage funding rounds linking qualified investors with startups in Regulation D investments that essentially competed with venture capital funding. The firm found a market, but had little success, and when the bubble burst, Badger said it made a strategic decision to work with venture capitalists rather than try to compete with them.
In 2002 the firm had 10 employees and generated just $3 million in revenues, and was close to shutting its doors when it began to get calls from top venture capitalists including Kleiner Perkins Caufield & Byers, which had companies with profits or a clear path to profits that still couldn't get access to the public markets.
The sale and/or collapse of the so-called Four Horsemen boutique investment banks -- Montgomery Securities, Roberston Stephens & Co., Hambrecht & Quist and Alex. Brown & Sons -- had made it hard to get public deals done in the $30 million to $70 million range even before the IPO window slammed shut, and chilly markets were exacerbated by additional costs associated with such deals after passage of Sarbanes-Oxley legislation. This by itself automatically made it inefficient to raise less than $50 million in an IPO, Badgers said.
Since 2003, Advanced Equities' business has thrived by serving that market, raising money for venture-backed startups including Infinera Corp., Motricity Inc., Arbinet-thexchange Inc., eAsic Corp., Force10 Networks Inc. and Miradia Inc, and the firm has grown to 100 in-house brokers in Chicago, San Francisco and London and a network of 1,000 brokers worldwide, raising a total of $1.2 billion.
"We see a huge opportunity in this space as an alternative to the AIM and NASDAQ markets, but up until now we have been doing it like it was 1990, conducting traditional road shows," Badger said. "With Venture Gate, any accredited investor can request to join and after we confirm their standing; they can review potential investments online."
The portal has data rooms that allow potential investors to conduct due diligence with transparency comparable to what venture capitalists have access to, and the site features detailed summaries, videos, term sheets, product placement memorandums and media coverage. Advanced Equities will continue to produce road shows, with dates and locations posted on the site. It's fees would range to around 12% with cash and warrants taken into account, which Badger said falls in a comfortable range between the 7% a typical IPO would cost and the 20% carried interest that typically goes to venture capital firms.
Badger believes the time is right for filling that niche with a solid technology platform, and while the company isn't starting from scratch, he clearly has some of the old dot-com stars in his eyes.
"The market for late stage expansion deals was approximately $22 billion last year," he said. "And we like to think we could carve off 20% market share."--Clifford Carlsen
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