Small firms find financial 'angels' on SBA network

Finding investors is one of the top problems that small companies face when they try to launch new products but some federal agencies and universities have banded together to seed a potential solution: an online marketplace where companies can pitch their ideas to possible partners.

The Small Business Administration's Office of Advocacy with help from the Defense Department and eight academic groups has launched the Angel Capital Electronic Network (ACE-Net) an Internet-based service that aims to bring fledgling firms together with "angel" investors. Such financiers are usually wealthy individuals looking for promising start-ups that are too small to be of interest to venture capital firms financiers normally find such companies through brokers networking and word of mouth.

"It's knowledge brokering " said Jim Van Wert senior adviser for policy planning with SBA's Office of Management and Administration. "More and more that is going to be the government of the future."

Currently in its beta-test phase ACE-Net is designed to serve companies that need $250 000 to $5 million - more than individuals can raise from family and friends but less than the typical venture capital deal. Tiffany Haugen director of the Accelerate Technology Small Business Development Center at the University of California Irvine said small businesses are missing out on as much as $32 billion in capital that wealthy individuals would like to invest simply because many of them cannot afford the broker and legal fees they need to set up a securities transaction.

"The numbers are really quite overwhelming when you look at them " she said.

How It Works

ACE-Net would help by allowing companies for a fee to post online information about their business. Investors who are accredited by the Securities and Exchange Commission could register and obtain a password to look at these business plans and then contact the companies privately if they want to pursue a deal.

To save firms from the paperwork and legal fees that they would have to pay if they offered their securities to investors in multiple states the eight states in which ACE-Net operates have agreed to waive their own securities laws for companies that use the service. "We have developed some model terms and conditions " said Terry Bibbens entrepreneur in residence with the Office of Advocacy and states have agreed to use standard forms.

Since April the $250 000 ACE-Net system has been available to firms and investors in Massachusetts Pennsylvania. Texas California Arizona Wisconsin Missouri and Iowa and Bibbens said 20 more states are interested in joining. The Center for Venture Research at the University of New Hampshire maintains the ACE-Net Internet site for seven network operators (ace-net.unh.edu).

A User's Perspective

Haugen's organization is one of those network operators. Haugen said that to date four companies have joined ACE-Net through her node and she is working to bring investors online. Bennett Root president and chief executive officer with Safety Associates Tustin Calif. which was the second company to list with Haugen said he has not been "overwhelmed" with offers of capital but the service has potential.

"If we had this conversation in four months and there was still no response I'd have a whole different attitude " said Root whose firm has developed a new system for testing food during the manufacturing process. Some procedural bugs - such as how much information companies can post - need to be worked out he said and more firms and investors have to join.

Bibbens said he expects ACE-Net to roll out nationwide within the next six to 18 months. "We're just starting the marketing effort now " he said. "We wanted to get the beta site robust as far as [making sure it works and does not crash]."