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Angels & Revolutionaries

the panelists: working with angels

Mr. Witzel: Thank you very much, Guy. I'm sure the upcoming book will become required reading. By the way, although it's not yet published, you can pre-order a copy of "Angels & Revolutionaries," Guy's newest book, at

Now let's turn our eyes to the angels. Moderating our discussion is Ginger Lew, Managing Director and COO of the Telecommunications Development Fund ( which invests in small, emerging communications businesses. Prior to joining the fund, she served as Deputy Administrator of the U.S. Small Business Administration (, and served as general counsel of the U.S. Department of Commerce ( Prior to joining the Clinton administration, Ginger was an entrepreneur as a member of a high-tech startup in San Francisco. She gained her management, planning and technology experience during six years at Ernst & Young, advising technology companies on market expansion strategies for east Asia, Europe and Africa.



Ginger Lew


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Ms. Lew: Thank you, Fran. Many startups think of venture capitalists (VCs) as the primary source of equity funding, but, tonight, we will hear about another important source, private equity investors, also known as angels. Our first panelist is John May. John's been given an interesting title by TECHCapital magazine, Mr. Ubiquitous. John is managing partner and founder of New Vantage Partners (, a firm that mobilizes private equity into early stage companies and provides advisory services to both venture funds and private investors. He is also managing general partner of Calvert Social Venture Partners, L.P., a Washington, DC-based venture capital firm specializing in providing early stage capital and assistance to emerging growth companies; an advisor to and a member of the investment committee of the Women's Capital Growth Fund; and an advisor to the Next Generation Partners Fund. In 1991, John co-founded the Investors Circle, a national nonprofit group of 175 family and institutional investors working to grow the social venture capital industry. In 1996, he co-founded and became executive director of the Private Investors Network (PIN), an angel network sponsored by the Mid-Atlantic Venture Association ( which has grown to over 115 investor members.

John, what are your opening thoughts on angel investing?



John May


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Mr. May: It's a real pleasure to be here. I think it's true what we always say about angel investing—that it's a spousal relationship, a partnership. One of the key things I advise entrepreneurs when they inquire about money from others, is that, since the VCs are just so few in this country, they really do need to look at the private equity market.

Private equity can come with a lot more than just money. One of the main things is to do due diligence on them, just like they are going to do due diligence on you. Check out their strengths—what other companies like yours have they invested in and what are they going to bring to the party besides money? We call it "warm money," and I think one of the key things to do with angels is to try to make them understand and sell you on their non-money talents and skills, as well as the money.

I actually came up with a top 10 list, predictions on angel and revolutionary activities in the next 12 months in this region. When we get back together again, we'll see how many of them I'm off on, if any of you remember by then.

Ms. Lew:
John, can we put money on this?

Mr. May: Yes, but remember, 33-38% will lose money.

1. There will be a rise in the number and activity of "super angels," "capital-A" Angels, in the region, and less reliance on "small-A" angels—the checkbook angels.

2. A major East Coast conference for angel investors will be held during the winter. Stay tuned.

3. Neckties will disappear in the region and the Tie Shack at Tyson's Mall will go out of business.

4. There will be a shakeout in the online matching and brokerage services business—The Source Capitals, EDIE Onlines, Witt Capital's angel funds, Garage.coms, Venture Genesis, ACEnets and those not yet born—will see consolidation and/or shakeup.

5. Angel investor clubs with 40, 50 or more investors will grow throughout the country, complementing the emerging bands of angels. Stay tuned for an announcement by Cal Simmons and myself.

6. There will be one gigantic homerun in the region that will reward angel investors with multimillion dollar nest eggs and will create several new super angels in the region.

7. The explosion of angel-run startup incubators will continue and expand. In this region, we've gone from none, just two years ago, to four today, and will total at least six or seven by the end of next year.

8. "Dancing with angels" seminars will be announced for budding netpreneurs and other high-growth entrepreneurs in the region. These will be run by angels for entrepreneurs in this region.

9. A scandal will evolve when it is discovered that a Private Investor's Network member has planted a bug in the newly opened Morino building in order to eavesdrop on the term sheets being negotiated between the VCs and the netpreneurs. All you lawyers out there are salivating, I know.

10,. The next Angels & Revolutionaries session in the fall of 1999 will be rescheduled for the MCI Center when everyone that Fran Witzel knows and emails decides to show up.


Ms. Lew: Thank you, John. Next, we will hear from Laura Sachar. Laura is co-chairman and founder of StarVest Management, Inc., a private equity firm in New York that invests in business services, digital media and related information technology companies. Until recently, she was responsible for direct venture capital investments at Gabelli Securities, Inc. In 1992, she founded Sachar Capital, a financial advisory firm specializing in digital media. Laura is also founder and chairman of the New York New Media Association Angel Investors Program ( or Laura, we would like to hear your views about angel investing from the Silicon Alley perspective.



Laura Sachar


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Ms. Sachar: I'm here tonight because there is a revolution going on in New York where we are building a very important angel community. I'm sure that many of you have heard much about Silicon Alley. We're building this angel group in a different way than some of the groups that you have heard about. We are a little bit smaller, but we go through a very intense screening process and we try to add value to the companies that get involved in the program. We are sponsored by the New York New Media Association (, so the companies that present to this group are in the New York area. They are also in the digital media area. Those are the first two screens for companies that come in and talk with us.

Over the last year and a half, we have looked at 250 companies, met with over 100 and had 36 present to the group. About 16 of these have received financing and have gotten people involved with the management of these companies.

To find these companies, we meet as a committee with about 10 companies a month. Each company talks to us for about half an hour. We have seven or so angels in the room at that meeting. It's creating a very interesting kind of community and, through doing it, we have helped identify some very interesting ventures.

How do we pick these companies? As I said, first, they have to be in the New York region and they have to be digital media companies. After that, we are looking for companies that have big ideas, a big opportunity and—always the key—a management team, or at least part of the management team, who can execute. Of the 16 companies that have succeeded in raising financing through this program, many have not been high, high-tech companies. They are often content-related like or another company which outsources bookkeeping and CFO-type functions. We often find that, because New York is not Silicon Valley, some of the angels' backgrounds aren't in the high-tech area. They are actually more receptive to these other types of companies. Building this group is the beginning of our effort to participate in what we see as a growing tornado in New York, an important revolution.

Ms. Lew: Finally we will hear from the person Newsweek magazine refers to as the "Top Dog" in Greater Washington's high-tech community, Mario Morino. Mario's career spans 30 years as a business leader, social entrepreneur and leading advisor on information technology. He co-founded Morino Associates in 1973, which later became Legent Corporation, and was acquired in 1995 in one of the larger transactions in the computer software industry. Today, he is chairman of the Morino Institute, a nonprofit organization he founded to empower people and communities to use the Internet to achieve positive economic and social change. His particular focus is on entrepreneurship and youth development. He is also the founder and chairman of the Potomac KnowledgeWay, an initiative to prepare Greater Washington for competitiveness in the information and communications industries in the 21st century.

Mario, what are your thoughts on angel investing and, by the way, how do you have any time to be an investor?



Mario Morino


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Mr. Morino: The greatest time is with my three kids. That's the best investment of all.

Guy made a comment that I think is very important— that all money is not equal. It applies to the exchange with angel networks. You have to be very careful who you work with. Often, the value may be money, but the greater value for you will be knowledge. I don't want to minimize the exchange of capital. The exchange has a clear purpose, but I want to emphasize that when you start, you need a lot of help.

Gerald Benjamin talks about the importance of self-assessment in dealing with angels, and I think that's very important. It's hard to do because it means we have to look at ourselves. When Gerald asks, "Are you financeable?" he is asking three questions. Is your company financeable? Is it really? Second, are you financeable? That is what the investor probably looks at harder than any single thing. And, third, is the risk you are representing financeable? Sometimes I think that one of the best things we do at the Netpreneur Program ( is to show somebody that they're not ready to talk to a funder yet because they haven't answered those questions for themselves.

The idea of getting to the exchanges is necessary and we must do that, but I will argue that there is a reason for the capital scarcity, and that's because there is a natural evolution process in entrepreneurship. Without that evolution, a lot of people would go on who should never run a business. There is nothing wrong with having a more difficult model that makes you jump hurdles. That's what entrepreneurship is about. As Guy said, it's about doing the impossible. It's about doing what everybody says you can't do. The bozos may be saying that your venture is not feasible today, the trouble is that a lot of your family and friends aren't bozos. Actually, they can be a different kind of bozo. They're going to be friendly. They're going to give you the money for the wrong reason. They're going to give you the money because they like you, because they care about you. That's the worst reason in the world to give somebody money. It can be like giving heroin, simply extending someone's pain.

Let me moderate that somewhat. We need balance. Yes, we do need to fund more, especially in this region. We do have a gap because there are people who are fundable and the money is not coming. That's changing, however, and I'll argue that there are two mechanisms to look at. First, we are going to see a growing base of angels in the region. It's slow right now; it's frustrating, but the evolution is in process, and I believe it's a natural evolution. Second is the idea of formal exchange. I will argue, by the way, that the consolidation John talked about officially began this week with E*Trade ( I don't know if you saw the announcement, but E*Trade announced a new stock exchange for low-capitalization businesses, new IPOs and new private placements. As far as I'm concerned, it hits everybody in the field. I have to give you a disclaimer since I'm part of an investment firm that has invested in E*Trade, but there is a reason why E*Trade is signing up accounts at 7,000 a day. It's eyeballs. It's investors with money. It's investors who will move downstream quickly as these markets mature. We are seeing very good efforts like that, and like what David Amis at Amis Ventures ( is doing locally. I think these make a lot of sense. They are each going to have their niches. There will be different elements but it's an emerging industry in itself right now and there will be activity there. We are going to see a different monetary flow for private placements and IPOs emerge, probably near term, within 12 to 18 months. It's a phenomena of the Net. I told Guy it's a natural partnership for right off the block—you graduate from's Heaven and go to E*Trade.

The second thing brings us back to the angels, which John talked about in the region and Laura talked about in New York. Silicon Valley has had this advantage for years. There is no magic to it. No one designed the process for how the angels grew in the Valley. It wasn't just creating the angels organizations; it has been part of the social fabric since the software industry was formed. There were enough people who made it and who still played with the other kids on the block. That was the model. We just have to allow time for that model to evolve in each region, as it's doing in New York, Austin, Boston and as it's doing here.

What's happening here, fortunately, is that we are seeing people create big net worth. I joke about this because people always think that I made a lot of money. I did very, very well, don't get me wrong, but I keep saying, "You don't understand. I don't get a seat at the bar with my wealth in Silicon Valley." Think about that. Everybody made $150 million out there. We will grow up when we start seeing those net worths here, and, guess what, it's happening. Just look at the numbers in the last 18 months in this region, whether it's Yurie Systems or Ciena or America Online. Go down the list of people cashing out with big numbers. I don't know the exact totals, but we probably have created billions of dollars of net worth in this region in less than three years. It's young; it's new leaders. Give them a chance to start their investments. Some of them already have. There is a wholly different model. There is hope. Unfortunately, it won't all happen tomorrow, but it's there.

I'll leave you with this thought. I have had the pleasure in the last two weeks of participating in two events, both somewhat institutional. One was the founding of the National Commission on Entrepreneurship and the other was a new economy task force that was on Capitol Hill. Both groups were talking "new economy" for the first time and both were talking about the importance of entrepreneurs to the overall economy. They were talking about you. Among entrepreneurs is a subset which Guy calls "revolutionaries" and others call "the gazelles." Of the 1,000 information technology public stocks, just about half went public since 1996. Think about that. You could not be at a better time with your idea. You may have to hold out a little bit, but that's what being an entrepreneur means. You will fight, you will do all the things Guy talked about, but you have a wonderful opportunity. We have a country that's beginning to realize the importance of the new economy.


the audience: questions & answers

Ms. Lew: Our panel will now take questions from the audience. They are joined by Gerald Benjamin, president of International Capital Resources ( in San Francisco, a pioneering capital-forcing firm that links ventures with investors through 10 licensee offices in the United States, Canada and Mexico. He serves as chairman of the California Venture Forum and is the publisher of The Private Equity Review, a bimonthly magazine that reports on promising developmental stage ventures and analyzes the private equity investment market. He is also Executive Director of the Private Equity Research Institute and founder of Angel Way Capital Partners, the largest nationwide private investor network. This afternoon, in the first part of today's Angels & Revolutionaries program, he presented his seminar, "Finding Your Wings: How to Locate Private Investors to Fund Your Venture," to more than 350 people. That seminar is based on his award-winning book of the same title, and he will have a new book out next year.


Q: How can angels play a role beyond the earliest stage, for those companies which have gotten off the ground and are ready to take that next step?

Mr. Morino: It sounds like you are talking about a venture step which is typically not angel money. You might get second stage money from another set of groups, such as VCs. If you've gotten angel money, you have already sent a signal to the VC community that you are fundable, so there will be people who will look at you. Angels don't have the cash, typically, to play in those rounds. It's actually one of the problems of angel investing. They may be putting stakes in venture funds, but angels are usually not doing it as a primary investment. As an angel, when you start going into the second and third rounds, you start asking questions about whether you want to keep the money in that business because you will face different problems.

Mr. May: Another way to say that is that they're often putting their money in merchant banks. What you have to look for is ways that the wealth is accumulated. It's no longer called "seed," it's called "private equity," and you have to find different players, other intermediaries who are accumulating the wealthy family money and the angel money, but those folks aren't looking at seed stage any longer. They're looking at putting the money out in different ways. For that matter, five years ago there were no venture banks here. We now have three. So there are beginning to be different players. Look at the entire private equity marketplace. One of the big things in Silicon Valley is that the money's not in little boxes; you are getting the whole array.


Q: These days there is so much convergence, so many acquisitions and mergers and so many are immense, like NBC buying Snap. Do you think there is a way that the companies which are getting so large will be able to take advantage of the entrepreneur community in structured fashion rather than just coexisting side-by-side?

Mr. Morino: Look at the software industry, which is your model, candidly. There is a joke in the industry today that says you are going to grow for a while, then you are either going to be outserviced by ORACLE, pushed off the shelf by Microsoft or bought by Computer Associates. That's the end of the line; it's just a question of when. I'm going through a situation with a services firm today, a very good one, which has gotten the landscape mapped from a top investment banking analyst. It maps out Web services industries, and it shows that there are gazillions of mom-and-pop operations here and there, with maybe 50 players that are really quality firms around the country sitting in the upper quadrant. In the other quadrants are your major players, Computer Associates, ORACLE and Microsoft, sitting in the wings, and down here are all the telcos. Inevitably, these latter two blocks are going to acquire this block with the exception of a few that will make it. Now, don't take that as pessimistic. It's the evolutionary process. You are going to see consolidation, and there is nothing wrong with that in the long run. Some will make it all the way up the chain like AOL. AOL has lived through it, and, in all reality, even AOL's not beyond being acquired by somebody with a lot of money.

Audience member: Then, should entrepreneurs always have some sort of an exit strategy?

Mr. Morino: Absolutely, but do it in the right way. I always hate to see somebody thinking about exit strategy too strongly. I want you to be hungry to dominate your market. I want you to want to win. Still, at the same time, you should understand that there may come a time when you have to make a business decision knowing what your options are. Any company of any size today in the Web services business is in play, whether they know it or not. We were involved in a deal, and, within a day, several other transactions occurred in the space which, by nightfall, had eclipsed the strategic plan we had defined that morning.

Audience member: So an entrepreneur must grow or die?

Mr. Morino: Oh, yes, I absolutely believe that.

Mr. May: But you should be able to tell the investor what Mario just told us about how you fit into those quadrants, and you can't expect us to teach you the exit. We are backing you with our money and our time. You, as the entrepreneur, are telling us what you are doing with all of your data gathering, all of your Web searching, all of your analysis of the market. You are supposed to tell us how you are going to help us guide the market and how you are going to fit into its landscape. If you can't answer those questions as Mario posed them, you don't deserve to get the money.

Mr. Morino: That's the hard part, yes.

Ms. Lew: It's also important to recognize that you can have more than one exit strategy. You can have different scenarios, but it's critical that you have an exit strategy for the investors. Otherwise you don't deserve to be funded.


Q: First, could you define a "super angel," and, second, what kind of action have you seen by socially responsible investors within the netpreneurial group?

Mr. May: Well, the latter is a little tougher, but as to the former, I recommend that you look at the 12 categories in Gerald Benjamin's book, which you should use when you're identifying your best match. My three categories start with the "small a" angels, or the "checkbook angels," who provide $5,000-$10,000 and doesn't use a lawyer. They probably aren't all that sophisticated and have very few coat tails.

"Super angels," to me, are on the other end, the kind of people Mario mentioned who are really their own venture capital fund. They are capable of making multi-million dollar investments, but they are still principal-to-principal. They deal with you. You are a principal and they are a principal, yet they control wealth equal to what venture funds have.

What we're finding in the Private Investors Network is the "capital A" angels. These are the $50,000-$250,000-a-year angels who like to co-invest and who are willing to do multiple transactions. Those are the people we need in this community, and the kind we are finding.

There are a lot of people who get psychic reward from a lot of their investments, as well as being more patient capital. That's the big difference from venture capital that is managed by fiduciaries. Those folks have bosses, they're limited partners and they live or die by their rate of return only. An angel can have multiple objectives, some of them other than pure rate of return. Whether you call them "socially responsible" or "mission-related," or whether you just call them good community citizens, there are a lot of angels who believe in long-term corporate growth and the growth of entrepreneurs as much as they care about the short-term finances. That's what we hope to grow in the community as well.

Ms. Lew: I think it's extraordinarily rare to find the sort of super angel, but I recently came across a situation where one private investor invested $7 million of his own money as a private angel investor in one company. It was principal-to-principal, and he was able to go through several rounds with this company and grow it. It was in the Midwest, actually, but it's a community that is starting to grow.


Q: Some people have spoken about the importance of branding this region. Some have rated our nation's capital city 51 out of 51 for the well-being of children. Working as I do with a non-profit organization, my question is what are your views on how we can address these bottomline issues and brand this region as a place that we can all be proud of, one that people will want to leave Silicon Valley for and come here to work?

Mr. Morino: You don't brand a region. The world has already branded it. It's the nation's capital and it's the world's capital and we should be proud of both. For some reason, we keep thinking we've got to be somebody else. We just have to recognize that we're going to be the capital in a new economy. That's our future. We can go through all the naming. We can go through all the drills. We can play all the charades, but some reporter some day is going to just pin a term on us and that term is going to stick the way it did with Silicon Valley or Route 128. Austin, Texas, doesn't have a brand name. It's Austin. Is that a problem? I don't think that's our job, and, if we perform, it won't matter. Let's stop worrying about how we sell ourselves and just perform and we will prove our point.

To your second point, I think you have two very divergent issues. The branding has nothing to do with the kids in the District. That's a different problem, and I think we're seeing a group of leaders emerge today who are very young, who have net worth and who care about those issues. It perhaps hasn't surfaced visibly yet, but I'm very lucky to see and be around some of these folks. They are a new breed who want to do something positive in the region. It's not there yet, but they are willing to open up their pocketbooks. I was just with Jonathan Ledecky this week, a man who has poured money into the District. He's ready. He's creating a foundation. Jim Kimsey has just created a foundation and so has Steve Case. They want to do something to help. They are not going to sit back and wait on anybody else. They are going to make a contribution, and we are going to see our industry step forward aggressively and lead, just like others have done before.

Mr. May: Yes, right now it's still somewhat subterranean. Almost all of our angel clients also have foundations, and they are doing things with their time as well. That's not where we deal with them, and it's not our subject tonight, but you can look at how the regional leaders are trying to make sure this stays a community, as Mario has done with the Netpreneur Program, or the fact that the Mid-Atlantic Venture Association ( is having its big venture fair downtown next year, not out in the suburbs, or the way that the Private Investors Network rotates its meetings between Maryland and DC. The main thing is for the key leaders to put their money where their mouths are in terms of wanting to live here and keeping their kids in schools here. That's sort of an underground story. We're just starting to have an angel story, so it's pretty hard to talk about their community-building.


Q: This has been a great day with a lot of very important information. You have presented me with a conundrum, however, by saying that if my first round of financing is from an angel, my second round is likely not from a VC. My business plan currently calls for that scenario. Should I avoid the angel in the first round or avoid the VC in the second?

Mr. May: Never avoid them.

Ms. Sachar: In New York, we made a conscious decision to select companies that were raising money before they would go to VCs so that way we wouldn't compete against the VC community. We look for companies that generally are raising less than $2 million and will take lower amounts from each individual because we want people to be able to come in and truly participate at different levels. We ask everyone who participates to make a commitment that they will invest in at least one of these companies through the year, but we don't set a very rigid minimum. Why wouldn't you want to approach angels and VCs?

Audience member: Well, I do, but the statistics presented by Mr. Benjamin earlier this afternoon were that only 10% of companies who got their first round through angel financing are successfully getting venture capital later. It seems as if that is detrimental to getting the larger investment in the second round.

Mr. Benjamin: It's not exactly detrimental. The issue goes to the relationships and you have touched on a major issue. Last year, I was invited to speak at a conference of about 350 venture capitalists. They asked me to speak on the issue of how angels and institutional investors could work together better. There are biases that exist in both of these communities. There are companies, for example, that come to me saying they would never think of going to an institutional investor. They are so strongly convinced that it's nothing they would ever conceive of doing. At the other end, there are companies which are very appropriate for institutional investment, so I think that there is a conflict within the funding arena between angels and the institutional community that has not been worked out. It's not your fault. It's confusing to you and it's difficult for intermediaries, but it's a fact of life. That statistic is a legitimate one, but the thing you have to understand is that it's part of the problem. We are at the stage where the angel community is so active that we are starting to address that issue and the institutional industry itself is looking at the relationship.

I believe there is a bias where an institutional investor says, "I don't want to get involved in a deal that has 50 checkbook angels in it and have to deal with those people. That's the last thing I want to do." Education is clearly an issue, not only for entrepreneurs trying to learn the skill of raising money—something we don't learn in any MBA program—but also for investors who have to learn the art of investing. Just because someone made a million dollars in an investment doesn't mean that they are a sophisticated angel investor or that they understand the dynamics of this market. We must have the guts to stand up and educate the angel capital community as well. That's a difficult task, and it's why we have to address those values about money.

I have opened 10 offices in the United States and Canada. It's taken me 10 years. This is the tenth office here in this region. It wasn't my first one. My first one was in Silicon Valley. It wasn't my second one. That was in Boulder, Colorado. This was the last place I came, but I didn't come here by accident. It's time to be here now. There is an evolution that has occurred. Part of it is deal flow, which is starting to come out of this region. Number two is money. There is money here now and 40% of those deals can be pulled together with that deal flow. Number three, there are intermediaries willing to take the risk and work on these deals. You are emerging as a community and, because of that, you are going to draw people, you are going to draw networks, you are going to draw the kind of resources to make it happen. Nonetheless, what you have touched on is a significant issue and, although we are not going to answer it here tonight, it's a very real problem.

Mr. Morino: I'll give you an example of the frustration a VC can sometimes feel for an angel. Typically, the kiss of death is families and fools. You can't stand them in deals—I can't be any more blunt about it than that—because they don't know what they are doing in a deal. You start getting into a transaction and they hold it up. All of a sudden you have a nuisance problem. I'm just being candid with you. To Gerald's point, this requires education across the board. We have a situation right now where a number of us are going into a deal where there is an angel involved who has antidilutive rights. The angel is a friend of the entrepreneur. I've said to him, "You have the choice. You can either tell your friend that the antidilutive rights are over, or you are not going to see money. I'm telling you that as a friend. The next time they will not be as polite. The book will just shut and you'll be out of the room."

Mr. May: Another way to look at this is to think of the new, more sophisticated angels not as the last round of friends and family who come in before the VCs, but as the first round of professional money. You should almost approach it as if they are the "series A preferred." Effectively, they will be training you and starting you on the path to accept more and more money, professional money, with all the baggage that goes with that. That's instead of assuming that you are going to take them as the last round of the "good guys"—the ones you know, who are your friends and who screw up the deal later because they are impeding the professional money. In the new world, look at angels as if they were the first, early VCs, not as if they were the last of the friends, families and fools.

Mr. Morino: Let me add to that by giving you a positive example. There is a firm here in which an old friend of mine is an angel investor. There are a ton of VCs who know him very well, and I guarantee you that, when that company is ready, the VCs will be there because he's in the deal. You want to make sure you have someone like him somewhere in your chain.

Audience member: John, one of your predictions was that there would be a shakeout in the Internet matching sites. Why do you think that and what will be the characteristics of the survivors?

Mr. May: If it is a purely technological approach to introducing people, it is less valuable than if it has either a quality screening or education component on one side, or if it is has active, quality angel investors on the other side—as opposed to playing a technology fix or a numbers game. I think the ones that will win will either have connections in other parts of the food chain, like E*Trade or Witt Capital, or they will be the ones that are connected through on-the-ground, interpersonal ways of meeting the entrepreneurs tied to the use of the technology. I don't think it's so much that they will fold, they will just have to find the right way to use their particular excellence, their niche, their technology in a way that is meaningful to the process—a process that has been face-to-face historically. You have to integrate the best of their "getting to know each other" and the principal-to-principal practices with the new use of technology and communication. The ones that know how to marry the two will be successful and the ones that are trying just to use a telecommunications technique may not be as successful.

Mr. Benjamin: It goes to the issue that you are selling a highly liquid story—security—and the attempt to sell a highly liquid story cannot be done through any electronic matching mechanism. The electronic matching mechanism was a very important development in the evolution of this "market," and I use that last word loosely at this stage.

Given the securities loss, given the well-intentioned nonprofit executives and bureaucrats who started those mechanisms 10 years ago, and given the lack of a profit motive driving it, it served a very important function. It started to develop small clusters around the country, primarily fueled by institutional investors initially, not angels. VCs supported those networks initially, and those networks evolved over time. The angels, perhaps, evolved, but the technology did not. Matching networks that use software to match an investor and an entrepreneur through a questionnaire, that is not a relationship. This is a psychological transaction that requires the building of trust, the building of a relationship, one sale at a time. It cannot be done with a questionnaire, no matter how much we would like to vest ourselves of that task. All the Internet has done is to make that process a little bit more glamorous, a little bit more sexy, and, perhaps, give it a little better chance of happening. But, the fact is only $44 million was raised last year in Internet transactions at this stage of development. That is a drop in the bucket relative to the $30 billion in transactions that were closed, so why spend time, money and energy at this stage in that mechanism's development?

I'm not saying that without the development of changes in the securities laws and some of the other issues, the mechanism cannot become effective. I believe it can become effective, but it will become effective when it has the same structure as a Charles Schwab or when an investor can invest in a diversified set of private placements with a $25,000 amount, where all of it is not into a blind pool, but the money is going into a specific set of deals. I think that there are models that will make that work. Those models are not here, and the securities laws, very frankly, make it too dangerous to do it. I think it's better to go back to, as Guy was using the word, analog.

Take this situation. You can do research digitally. I think that there are some magnificent education and research sites that will open up your eyes and help to educate you in real time, but there is no substitute for meeting an investor eyeball-to-eyeball, making the pitch, working through the process and providing them the summary first, asking for an appointment, giving them the business plan, doing your road show presentation, weathering the storm of objections and learning to go through the due diligence process into the negotiation and deal structure and valuation discussion—and failing a couple of times for every guy you finally convince to write a check. There is no substitute for that.

Mr. Morino: I think you are going to see these match networks evolve officially, short of the PPMs and IPOs, when they are focused regionally, for the very reasons that Gerald went through. It's like Kleiner Perkins saying that they want to do deals in the Bay Area because they can get to the companies. When you are dealing with early stage companies, proximity is vital. I wouldn't be surprised if the evolution is an emphasis on proximity even though it's electronically facilitated. As Gerald has pointed out, the fact is that people will still like to get together for these types of relationships.


Ms. Lew: This has been a terrific evening. I know all of us have learned a great deal, and I'd like to summarize it with two quotes from our two speakers.

One is from Mr. Benjamin, who wrote in his book, "Enthusiasm, courage, patience, persuasiveness and tenacity, these are foremost among the traits of a successful fundraiser and entrepreneur."

The other, in Guy's prosaic terms, "Create like a God, rule like a king, and work like a slave."

Welcome to entrepreneurship.

We would like to express our appreciation to Gerald Benjamin, John May, Laura Sachar and Mario Morino, for sharing their insights and experience.

Please join me in giving them a well-deserved round of applause.


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