BRIGHT IDEAS
Start Me Up
A new Silicon Valley company has come up with what may be the ultimate innovation -- a way to make money on ventures before they launch.
by Tia O’Brien
 MATCHMAKER: Kawasaki’s company brokers deals between investors and entrepreneurs. |
Garage.com is an Internet-based matchmaking service that pairs the Valley’s most promising start-ups with financial backers searching for the Next Big Thing. Based in Palo Alto, it is winning national attention, in part because of its well-known founders, who may have come up with that most sought-after of all Silicon Valley innovations -- a new way to make money. Better yet, they plan to make money off start-ups before they’ve even started up. The strategy: Garage.com grooms select entrepreneurs in search of seed money (deals between half a million and $2.5 million), then tries to hook them up with influential investors via its website (you guessed it: www.garage.com).
At the helm is CEO Guy Kawasaki, ’76, one of the original members of the Apple Macintosh marketing team. During the early ’80s, he was charged with recruiting software developers for the Mac and he ended up building a cult following for the underdog computer company. Kawasaki became one of industry’s first “evangelists” and delighted in beating up on bigger companies like IBM and Microsoft.
Since then, Kawasaki has become an author and speaker on small-business strategy. His books include How to Drive Your Competition Crazy and Rules for Revolutionaries, due in February. Now, he wants to use his marketing chutzpah and vast network of connections to fire up his new enterprise, one he hopes will help birth a new generation of technology smash hits. “I want to help launch the next Apple,” Kawasaki says. “We are like a triple-A farm team for entrepreneurs before they go pro.”
Not only is Garage.com promising start-ups a limousine ride to the front door of the Valley’s money men, it also is trying to bring some order to the often chaotic start-up process. Instead of entrepreneurs and investors randomly searching for each other, they can make the connection through the Garage.com website. And the company is trying to make it easier for investors to analyze deals: all entrepreneurs must use a standardized form to detail their business plans.
The new company’s success hinges on whether it can create an exclusive club that, as Kawasaki puts it, “screens out the riffraff” and delivers the best ideas to an elite group of investors. To make money, Garage.com must deliver two critical components: talented entrepreneurs who are willing to pay for its services and investors who agree to be included in the “Heaven” section of its website. Heaven, of course, is where investors -- angels and otherwise -- pay for access to brief but tantalizing descriptions of promising high-tech sizzlers. Without hot start-ups, investors will have no reason to use Garage.com’s matchmaking service. And start-ups won’t pay Garage.com’s fees if it can’t deliver financial backers.
“It looks like they’ve done their homework,” says Jeffrey Sohl, director of the University of New Hampshire’s Center for Venture Research, which studies individual investor behavior. “It’s clearly not small-market, low-growth companies. It’s quality deals.” He views Garage.com as yet another angel model -- one with better odds of succeeding than the handful of other electronic matchmaking services, which tend to throw fledgling laundromats in with high-tech companies and are prevented by federal regulations from making investment recommendations. (Garage.com can give such advice because it has a staff of licensed broker-dealers.)
The Garage.com team will work with fledgling entrepreneurs, grooming them like debutantes to ensure their success. |
Kawasaki and his team spent months pitching the Garage.com idea to their network of Valley VIPs. Their hustle has paid off. “It can become a marketplace where people say, ‘Why should I worry about rounding up 10 angels when I can go to Garage.com’,” says investment banker Sandy Robertson, former CEO of Robertson, Stevens & Co. He’s just one of the many prominent backers who helped raise more than $4 million to launch Garage.com itself. The investor list includes Ben Rosen, chairman of Compaq Computer Corp.; the prestigious Valley law firmWilson Sonsini Goodrich and Rosati; commercial banker Young J. Boozer, III, ’71 (like Kawasaki, a Stanford Alumni Association board member), and financial powerhouses Credit Suisse First Boston, Silicon Valley Bank and PricewaterhouseCoopers.
The company’s founders and technology advisers are an equally impressive cross section of the elite, including 20 Stanford grads. Six of the eight board members have Stanford affiliations, including company president Bill Reichert, MBA ’81; Rich Karlgaard, ’76, publisher of Forbes magazine; Joseph Grundfest, JD ’78, commissioner of the federal Securities and Exchange Commission; and Craig Johnson, JD ’74, founder of Venture Law Group.
In spite of this star-studded cast, Garage.com is no sure thing. Serious questions remain about whether entrepreneurs will hand over the piece of the action Garage.com expects in return for its services. For every start-up matched with a financial backer, Garage.com is asking for up to 5 percent equity stake in the resulting business -- and that’s on top of a placement fee equal to 5 percent of the money raised. Critics are not convinced that the best entrepreneurs will pay such a steep price, especially since they’ll almost surely have to give up a much bigger piece of their company when it comes time for the next round of funding by venture capitalists.
“That sounds like a lot,” says Sohl, the Center for Venture Research scholar, who believes Garage.com may have to reduce its take. “If I’m a smart entrepreneur, I’ll try the street first,” he says. “Then the 5 percent is mine.”
Kawasaki insists Garage.com is worth the price because its coaching and contacts will increase a start-up’s value. Before investors ever see a fledgling company’s business plan, the Garage.com team will work with the founders, grooming them like debutantes to ensure their success. “In the end, entrepreneurs will make more money, faster,” Kawasaki says.
Barry Spencer, the founder of Reality Fusion, was sold. After a host of Valley financiers refused to back what he describes as his “revolutionary” interactive video software, Garage.com helped him secure half a million in funding. It was Garage.com’s first deal. “Kawasaki is a networking animal,” Spencer says.“He knows everybody and he’s influential.”
There’s no shortage of eager entrepreneurial applicants -- more than 200 poured in the day before the website even opened for business. But are theirs the kind of quality ideas that will keep first-rate investors in Heaven? The real test will come late this spring. To pack Heaven with heavy-hitting financiers, Garage.com waived the investor membership fee until April 1. After that, getting into Heaven will cost $10,000 for professional investors, $2,000 for individuals. Obviously, they’ll only pay if Garage.com is delivering tantalizing deals.
“Our ultimate success doesn’t depend on how many memberships we sell, but on how many deals we do,” Kawasaki says. “This is a new idea. It takes a while to build critical mass.” Garage.com has made a good start. But after 14 years in Silicon Valley, Kawasaki knows the odds better than most: an estimated nine out of 10 start-ups fail.
Tia O’Brien, a frequent contributor to Stanford, writes about technology, business and politics.