dot com fever BLACK-ORIENTED.WEBSITE ARE FINALLY ATTRACTING CAPITAL. HERE'S HOW TO GET YOUR SHARE.
IF YOU HAVEN'T CAUGHT THE BUG BY NOW, CHANCES ARE YOU know someone who has. Dotcom fever has affected everyone from the CEOs of some of the largest companies in the world to awestruck awe·struck also awe·strick·en
Full of awe.
overcome or filled with awe
Adj. 1. teenagers hoping to become the next Jeff Bezos Jeffrey Preston Bezos (born January 12, 1964 , Albuquerque ) is the founder, president, chief executive officer, and chairman of the board of Amazon.com. Bezos, a Phi Beta Kappa graduate of Princeton University, worked as a financial analyst for D. E. Shaw & Co. , founder of Amazon.com. For some, the lure of equity and a six-figure salary is enough. However, the more acutely affected tend to leave secure corporate positions to launch their own Internet businesses rather than just work for a dotcom company. And who can blame them?
Every week we are regaled with tales of newly minted 20-something millionaires. The U.S. economy, stock markets and job markets have all been turbocharged by the information technology sector--specifically those companies with a presence on the Internet. It takes a strong will (or a blind eye and a deaf ear) to witness what has been called the greatest period of wealth creation in our nation's history and not be tempted to try your luck. If the headlines are to be believed, all it takes is an idea and some start-up capital, and you're well on your way to an early retirement. But for many, especially African Americans African American Multiculture A person having origins in any of the black racial groups of Africa. See Race. , securing that capital is the hardest part.
Fortunately for would-be Internet moguls, the private-equity markets are more pliable than ever before, especially in the technology area. Information technology companies received over 60% of the $12 billion in venture capital investments in 1998. The total amount of venture investments ballooned to $21 billion in 1999, with Internet companies such as Webvan Group, Datek Online and VIA Networks again getting the biggest shares. Clearly there is plenty of capital out there, a fact demonstrated by Redwood City Redwood City, city (1990 pop. 66,072), seat of San Mateo co., W Calif., on San Francisco Bay; inc. 1868. Manufactures include commmunications, electrical, electronic, and medical equipment. , California-based CoSine Communications, which staked a claim to $94.5 million in venture capital (see below).
GETTING YOUR PIECE OF THE PIE
The key is knowing how to get capital, and African Americans heretofore have not been prominently placed in the technology startup or venture capital arenas.
"We're virtually invisible when it comes to capital formation in information technology," says management consultant Tama Smith of the Los Angeles-based management consulting Noun 1. management consulting - a service industry that provides advice to those in charge of running a business
service industry - an industry that provides services rather than tangible objects firm Tama Smith & Associates Inc., which coaches technology start-ups through the business-planning process and often introduces them to venture capitalists Venture Capitalist
An investor who provides capital to either start-up ventures or support small companies who wish to expand but do not have access to public funding.
Venture capitalists usually expect higher returns for the additional risks taken. and investor angels. "But there's an opportunity to play a more significant role by generating unique business ideas and pulling together a team that can execute them." Of course, having a good idea is only part of the solution. Access is a critical part of the venture capital equation. "The way you get to a venture capitalist is almost as important as how good your idea is," she says.
Most venture capitalists won't even look at a business plan unless someone they trust has screened it. They rely heavily on the recommendations of others in the industry to separate the wheat from the chaff chaff
1. chaffed hay; called also chop.
2. the winnowings from a threshing, consisting of awns, husks, glumes and other relatively indigestible materials. . And, to date, a major problem has been that the majority of venture capitalists who invest in technology start-ups are not people of color Noun 1. people of color - a race with skin pigmentation different from the white race (especially Blacks)
people of colour, colour, color
race - people who are believed to belong to the same genetic stock; "some biologists doubt that there are important . "[We] black professionals tend not to network extensively outside of our own predominantly black networks, and it has hindered us in a high-tech industry that is based on relationships," says Fritz Jordan, former CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. of Venture Capital Online (www.vcapital.com), which invests in seed- to early-stage Internet companies, both business-to-business and business-to-consumer.
But the good news is that the capital channels are beginning to open up, if you know how to tap them. There is a growing community of tech-focused African American venture capitalists, investor angels and professional service providers who can offer insight, expertise and access to capital markets.
SHAKING THE MONEY TREE
Before embarking on your money quest, there are a few things to consider to prepare yourself for the road ahead:
* Founders of successful venture capital-backed companies usually don't end up with a controlling interest controlling interest
The ownership of a quantity of outstanding corporate stock sufficient to control the actions of the firm. Controlling interest often involves ownership of significantly less than 51% of a firm's outstanding stock because many owners fail in the company. "If you are more concerned with maintaining total control of the business and passing it on to your children than growing it and making it successful, then the venture capital community is probably not your best bet," says Derrick derrick: see crane.
famous hangman; eponym of modern hoisting apparatus. [Br. Hist.: Espy, 170]
See : Execution Collins, a partner at Polestar Polestar: see Polaris. Capital Partners (www.polestarvc.com), a Chicago-based private-equity firm that targets minority-owned technology companies.
* Venture capitalists will usually focus on a liquidity event--typically a sale of the company or an IPO--to generate a return 20 times their initial investment. And don't expect them to wait 10 years to cash out. "We have a duty to our investors to give them a healthy return on their investment within a very specific time frame, usually within five years," adds Collins.
* Size matters. Venture capitalists are concerned with the size of the market and the speed with which your firm can capture a significant market share. "Companies that target billion-dollar markets [such as the automotive industry The automotive industry is the industry involved in the design, development, manufacture, marketing, and sale of motor vehicles. In 2006, more than 69 million motor vehicles, including cars and commercial vehicles were produced worldwide. ] are the most attractive because they give us the best chance for the highest return on our investment," says Charles Sheffield Charles Sheffield (June 25, 1935 – November 2, 2002), was an English-born mathematician, physicist and science fiction author. He had been a President of the Science Fiction and Fantasy Writers of America and of the American Astronomical Society. of New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of based Carthage Venture Partners (www.carthage.net), an African American-owned private-equity firm that targets minority-owned technology companies.
Carthage, formed in 1996, is comprised of Sheffield and fellow partners
Anthony Gee and Steve Sallion, and associate Erik Miller. Its interest in companies that target businesses rather than consumers is indicative of a rising trend. "The business-to-business market is only just developing, and it's over 10 times the size of the business-to-consumer market," explains Sheffield. Although the firm's last two investments were in the business-oriented companies B2EMarkets.com and jumpcut.com, it does not rule out investment in consumer-oriented companies. As a rule of thumb, Carthage seeks to invest between $500,000 and $5 million in a chosen start-up.
Your next step? Developing a compelling dotcom business plan. For a discussion of key features to include, see "Crafting Your Dotcom Business Plan" at www.blackenterprise.com.
ROUND ONE: TOUCHED BY AN ANGEL
Kim Folsom started out using her own money. "I financed the startup of my first company with my own funds and bank loans. Believe me, raising venture capital is a better way," says Folsom, the CEO of SeminarSource.com. Launched in June 1998, Folsom's latest venture is a San Diego-based company that helps organizations such as Prudential Securities, the American Marketing Association The American Marketing Association, one of the largest professional associations for marketers, has 38,000 members worldwide in every area of marketing. For over six decades the AMA has been the leading source for information, knowledge sharing and development in the marketing profession. , the National Black MBA Association The National Black MBA Association is a professional association for African Americans with a Master of Business Administration. The National Black MBA Association was formed in 1970 and currently has 40 chapters and 6000 members in the United States. Inc. and African American Women on Tour extend the reach of their conferences and seminars via the Web.
In her first round of funding, typically called the seed stage or "angel round," Folsom raised $1.2 million from several angel investors An individual who invests his or her own money in a private company, which is typically a startup. An angel investor is not an employee or member of a bank, venture capital firm or other financial institution that normally makes such investments. , individuals who finance emerging entrepreneurial ventures. If at all feasible, you want to raise capital from investors who bring more than just money to the table. Look for industry experience and connections.
The angel round typically goes up to about $1 million and usually doesn't include money from professional venture capitalists. Since the venture capital market has expanded so dramatically, many venture capitalists no longer participate in seed-stage opportunities. "A venture capitalist who might have invested $100,000 in a company several years ago now invests a minimum of several million because of the high volume of deals that are being done," explains Karen Kerr of Arch Venture Partners (www.archventure.com), a Chicago based venture capital firm that focuses on seed- and early-stage technology companies. "A company that's just starting can't take that kind of investment because it will dilute the ownership structure too dramatically. Instead they turn to high net worth individuals or investor angels."
Therefore, "you need to have access to people who can invest in the deal," says Folsom, who advises developing relationships with attorneys, accountants, bankers and other service providers who can introduce you to potential investors. You'll also want to create an advisory board of individuals with industry experience or connections to help with the strategic direction of the company as well as to provide introductions to sources of capital.
Before you accept any funds, it's important to engage the services of an attorney familiar with venture capital deals. "Your attorney will represent the company in the process of getting itself organized and funded and negotiate on the company's behalf from the termsheet stage through final documentation," explains Craig Venable, an attorney with the Silicon Valley-based law firm Cooley Godward L.L.P. The term sheet reflects the valuation of your company and delineates the parameters of the investment.
Your company's valuation is based on several factors, including the experience of the management team and the state of the development of the business. "Typically a start-up with a good business model and a proven management team but no revenues, proprietary technology or customers can expect to be valued by Arch Venture at between $2 million and $5 million," says Kerr, who admits that setting valuations is more art than science.
"If you want to get a more favor able valuation, try to get a strategic corporate partner," says E. David Ellington, president and CEO of NetNoir (www.netnoir.com), a San Francisco-based African American Web portal See portal. . He was able to get America Online See AOL. (which announced plans to merge with Time Warner on January 10) to invest at a valuation of $5 million, which set the stage for later investments. "Corporate partners value a company a lot less harshly than venture capitalists, who are focused solely on maximizing their return on investment," he says.
ROUND TWO: BEYOND START-UP
Almost as soon as you've secured your first round of financing, it's time It's Time was a successful political campaign run by the Australian Labor Party (ALP) under Gough Whitlam at the 1972 election in Australia. Campaigning on the perceived need for change after 23 years of conservative (Liberal Party of Australia) government, Labor put forward a to begin thinking about the next round and what milestones your company needs to meet to secure it. For Kim Folsom and SeminarSource that meant adding features and functions to the Website, signing key customers, filling out the management team and launching the product.
"As you're forecasting your milestones, you also need to forecast your capital requirements Capital requirements
Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. for the next round and start spreading your story to people," she says. To keep SeminarSource.com on track for success, Folsom raised $2.5 million in the second round from a mix of angels and professional venture capital funds Venture Capital Funds
An investment fund that manages money from investors seeking private equity stakes in small and medium-size enterprises with strong growth potential.
Notes: from SynCom, a Silver Spring, Maryland-based minority-targeted private-equity firm. SynCom recently expanded its focus from communications properties to include technology start-ups such as Seminar Source, NetNoir and B2EMarkets.com. Folsom expects to raise $10 million to $15 million in a subsequent round and looks to have purely venture capital investment.
"When it was time for our second round, I knew we needed to get professional venture capitalists involved if I wanted to compete with the Lucents and Ciscos of the world, because of the additional credibility and resources they bring," explains Dean Hamilton Dean Hamilton (born 13 February 1961 in Windsor, Ontario) is a Canadian actor and director. External links , CEO of CoSine Communications, which offers Inter net service providers (ISPs) the ability to offer value-added services A value-added service (VAS) is a telecommunications industry term for non-core services or, in short, all services beyond standard voice calls and fax transmissions. such as virtual private networks to their business customers.
For Hamilton, that meant using the $3 million in angel funding that he secured in November 1997 to setup the company and begin proving the market for his product. By August 1998 it was time to engage the professional venture capital community. "It took us nearly three months to close our second round despite the fact that CoSine had grown to 60 employees, proven its technology and had established customer contacts with companies like Qwest Communications
"Once we raised the second round, things started to change very rapidly for us," says Hamilton, who raised $22.5 million in a third round from some of the top venture capital firms Name Location Founding date Managing Partners/Directors Specialty Capital managed
5AM Ventures Menlo Park, CA; Waltham, MA 2002 John Diekman, PhD (managing partner), Scott Rocklage, PhD (managing partner), Andrew Schwab (managing partner) life sciences $200M  in the world.
The collective weight, expertise, connections and guidance of these professional firms has propelled CoSine to rarefied rar·e·fied also rar·i·fied
1. Belonging to or reserved for a small select group; esoteric.
2. Elevated in character or style; lofty.
1. air. To date, CoSine has raised $94.5 million, including $60 million in a successive round in August 1999. "After you've raised a few rounds it becomes easy to do, because you have a network of people and companies to draw on," says Hamilton. "It took three months to raise our second round of $11 million--and only one week to raise our last $60 million."
Certainly raising venture capital is not easy. But for those who build their networks and learn the rules of the game, it can be a very productive experience. Expect to see more African American-owned companies having success in this arena. And if you play your cards right Play Your Cards Right (or Bruce Forsyth's Play Your Cards Right) was a British television game show based on the American show known as Card Sharks. The gameplay was basically the same. , one of them could be yours.