No Funing for Your Startup? Try a Venture Catalyst
Melanie Werner, No Funding for Your Startup? Try a Venture Catalyst, Fortune Vol. 139 No. 7, 12 Apr 1999
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How Dr. Drew Got His backing
Melanie Warner
When CEO Curtis Giesen was looking to raise money for his company, DrDrew.com, he made the rounds of Silicon Valley venture capitalists. Most of them liked his idea of building an online health and relationship Website around Dr. Drew Pinsky, co-host of the hip radio and MTV show Loveline and Gen X's answer to Dr. Ruth. They figured that in two years the New York-based startup could be worth $50 million. But that just wasn't big enough--and they all turned him down. "[The VCs] looked at our year-three number and said, 'We need to see ten times that,' " Giesen recalls.
So last fall Giesen and Dr. Drew turned to Garage.com, a new Palo Alto outfit that marries early-stage tech companies with investors. Run by the charismatic former Apple evangelist Guy Kawasaki, Garage.com canvassed its elite network of Silicon Valley investors and set up meetings for Giesen. From these meetings, the company raised a total of $1 million from five investors. Says a grateful Giesen: "We love being part of the Garage.com mafia. This wouldn't have happened without them."
Garage.com is part of a new and emerging group of so-called venture catalysts. Armed with more than just a catchy name, the catalysts help funnel some of Silicon Valley's venture capital to startups that for various reasons can't otherwise get their hands on it. Like DrDrew.com, the startup's market potential may be too small--VCs really want to fund the next Yahoo. Or the startup may lack experienced executives--VCs have a bias toward funding people who've done it before. Or perhaps the company is looking for a paltry several hundred thousand dollars; as VC funds have gotten larger, anything less than a $3 million investment seems a waste of time.
Garage.com and the two other most prominent venture catalysts, Interactive Minds in Pleasanton and Artemis Ventures in Sausalito, work with a relatively small group of entrepreneurs to find investors, partners, and customers; hone the business plan; and create a marketing strategy. They also work as headhunters, finding staff for key positions. "We can go in and roll up our sleeves much more than they [the VCs] would ever have time to do," says Randy Haykin of Interactive Minds. "We spend up to six days a month with our companies, and the average VC spends up to one day a month," echoes Christine Comaford of Artemis.
The personal service Comaford is touting comes at a price. When Garage.com brokers a successful round of financing, it takes up to 5% of a company's equity. Interactive Minds and Artemis each charge a monthly cash retainer or a percentage of a company's stock in return for their services. Founded last year by Comaford, an ebullient former entrepreneur, and her partner, Kimball Wood, Artemis has worked with four startup clients that have each handed over 3% to 6% of their stock and roughly $5,000 a month. (In the future, Comaford will invest through a $20 million venture fund rather than charge the fixed fee.) Interactive Minds, founded in 1995 by Haykin, a former vice president of marketing at Yahoo, and Carl Nicholas, a former Booz Allen consultant, charges different fees depending on its level of involvement. In instances where Haykin and Nicholas assume interim management roles and spend several days a week working on-site at a company, they'll charge as much as 3% equity and $15,000 a month. Interactive Minds also makes small investments in its eight companies from a $5 million venture fund it manages.
These hybrid approaches to venture investing don't sit too well with some entrepreneurs, who resent giving up extra equity or cash to get funded. "The [catalysts] are putting an unnecessary toll on the road to investment," says Joseph Ansanelli, the 29-year-old co-founder of Connectify. A nascent startup with no customers or revenue, Connectify, which makes direct-marketing software for businesses, didn't need venture catalysts. Working on their own, Ansanelli and his co-founder managed to secure $4 million in funding from Crosspoint Ventures and New Enterprise Associates in just five weeks. Some traditional venture capitalists also scoff at the catalysts, saying that Garage.com and its ilk do nothing new. "VCs help companies brainstorm on strategy, help with recruiting, and give introductions to business partners. The idea that we're not doing that is a load of crap," bristles George Zachary, a partner at Mohr Davidow.
But the entrepreneurs who have worked with Garage.com, Interactive Minds, and Artemis don't seem to mind the fees. Prescott Lee, of eCircles, a company that hosts Web communities, paid what he calls a modest fee for Haykin to work at the company for three months as interim vice president of business development. "It was definitely high value for us," says Lee. Haykin put together a $1 million round of financing last fall and helped nurture the company to the point where CMG@Ventures, a traditional VC firm with headquarters in Boston, is investing $6 million. Similarly, James Jonassen, CEO of a human resources software developer called PeopleMover, considers Artemis' work a "huge bargain." Comaford helped PeopleMover secure a $5 million round of funding this past December.
Whether venture catalysts can turn underdogs into profitable acquisitions or hit IPOs is still questionable. But given the fees they've managed to extract from their clients, if their hands-on approach uncovers a few diamonds in the rough, one thing's for sure: Expect a few more venture capitalists to call themselves venture catalysts.
