If you’re like most business owners, you love the idea of the capital you could raise by going public, but loathe the cost and regulation that would entail. Yet if you keep your firm private, you’ll likely struggle to get investors with serious money to notice you — and you and your investors will have trouble cashing out.
Thanks to Internet entrepreneur Glenn Ballman, you have another option, the Vancouver-based Genesis Exchange. Ballman, who founded online retailer Onvia.com Inc. in 1996 and raised US$70 million in private funding, launched Genesis in March 2006. It’s an equity market like no other: an unregulated, Web-based exchange where high-net-worth investors can buy stakes in private firms during a one-hour window each month. It’s also a bold experiment that has yet to deliver on its promise of much-needed liquidity for entrepreneurial firms — but is working wonders in another way.
To date, Genesis has facilitated just $200,000 in equity trades. Ballman says that’s largely because it’s limited to investors and firms in B.C., the only province to exempt Genesis from securities regulations. Although he’s working on exemptions in other provinces, Ballman says that, even with them, “we don’t expect the trading of private shares to ever go absolutely wild. It will likely always be a low-volume exchange.”
But don’t write off Genesis as a flop just yet. It’s fast emerging as a high-potential dating service for angel investors and private firms that lack the characteristics and connections to interest venture capitalists. So far, 2,500 private companies and 2,280 angels have registered for the service, which charges private firms $800 to join and $5 for each angel they e-mail through the Genesis intranet; angels participate free of charge.
Although the matchmaking service is in its infancy, it has facilitated $9 million worth of investment in Canada and the U.S., including a $7-million placement in Mississauga, Ont.-based Empathica Inc., which measures and manages companies’ customer relationships. Other firms financed include a provider of mobile payment services and makers of a vegetable-based milk alternative and of fire alarms that plug into power outlets.
Such angel investments could take off, now that Genesis has attracted a critical mass of thousands of investors and firms, with dozens more joining daily despite a limited marketing effort. It’s easy to see why: it offers the same attractions as a real dating service, such as a wide selection of prospects, a low-cost way to put out feelers to promising ones and a consistent set of data on every user.
The latter is central to Genesis’ appeal to investors. Firms seeking capital must complete a scorecard, then Genesis ranks them on 10 factors crucial to angels, such as patents, competitors, depth of management and potential market. Genesis uses its own algorithm to score each registrant, with no human interpretation of the data. Each investor specifies that he or she will only consider firms scoring, say, at least 500 points (a perfect score is 1,000). Either side can e-mail the other through Genesis, although firms can only contact investors whose minimum score they meet. Both parties can take a relationship offline whenever they wish.
Ballman acknowledges his scorecard is similar to the process VCs and angels go through before placing a financial bet on a startup. What makes Genesis unique, he contends, is that it is an electronic warehouse presenting data on thousands of companies scored on the same criteria.
Genesis also offers something a dating service does not: Ballman’s personal services as an advisor to either side. He has acted as a go-between on several deals originating through Genesis. He’s now doing so on a multimillion-dollar financing for Burbank, Calif.-based Be Jane Inc., a multimedia developer and licensor of products and services for women in the do-it-yourself home-improvements market.
Eden Clark, Be Jane’s Canadian-born CEO and co-founder, says completing the scorecard helps you prepare to present to investors. And she says Be Jane’s presence on Genesis gave it instant status with angels: “A lot of times, if you are starting out, you don’t have the network, so partnering with Genesis and using their exchange gives you exposure you would not get otherwise.”
That exposure is the real value of Genesis. As a trading exchange, it seems destined to remain an intriguing sideshow. But if it can maintain rapid growth in its user base, it will become an increasingly attractive option for entrepreneurs hoping to score a business-building connection.