Net Offers New Way To Raise Capital Spokane Man Launches Venture To Help Start-Ups Fund Growth
For years, Dave Lenartz watched as friends and acquaintances in the software and high-tech fields struggled to nurture ideas into profitable companies.
In too many cases, though, the brilliant concepts and hard work were stymied when the company got to the point it needed capital to grow and survive.
“If you are a small high-tech or biomedical firm that’s got a fairly strong track record and you need to fund your future with $1 million or $2 million,” Lenartz says, “there really aren’t many alternatives other than venture capitalists.
“And that price can be extremely high.”
In several cases, Lenartz saw people lose their companies to the venture capitalists they turned to for financing.
“And I get angry at that,” he says.
So earlier this year Lenartz began developing an idea he thinks will provide an alternative to small companies in need of growth capital.
This week, Lenartz will open a web site on the Internet, and Internet Capital Corp. will be in business.
His new Spokane company will help other small businesses conduct initial public stock offerings (IPOs) via the Internet, and then provide an exchange through which that stock can be traded as the companies grow.
Lenartz sees it as an opportunity to help incubate high-tech start-ups all over the country, and at the same time develop the real potential of the Internet.
“The World Wide Web has been great for static presentations,” Lenartz says, “but now it’s time to put it to work, and the securities industry is ripe for that.”
Lenartz is intimately familiar with the barriers facing start-up companies.
He is president and owner of Byte Dynamics Inc., one of the successful small software companies quietly growing in Spokane over the past decade.
Like most high-tech start-ups, Byte Dynamics was born in a basement. It lived there until growth forced it to larger quarters earlier this year.
Founded in 1989, Byte Dynamics has grown from a one-man operation to a company with nine employees. It designs custom software to client specifications in a variety of industries. Among its major customers are Itron and Kaiser in Spokane, and NYNEX Corp. in New York.
Lenartz also is active in Inland Northwest Technet, a group that seeks to be a catalyst for high-tech companies here.
Given that background, Lenartz’s imagination went into overdrive in March when he learned that an East Coast company named Spring Street Brewing Co. was attempting an IPO via the Internet.
“I heard a gun go off on a new market,” Lenartz says.
The commissioner of the federal Securities and Exchange Commission (SEC) took a personal interest in Spring Street’s undertaking, Lenartz says.
“Basically, he shut them down and reviewed them, made two or three recommendations, and then said, ‘You can do this. This is a neat way to raise capital.”’ Lenartz tried unsuccessfully to contact Spring Street, but couldn’t because the company was being inundated with contacts from other small businesses wanting to know how to do the same thing.
“So I talked with some attorneys, and the feeling was that given the ramifications of the World Wide Web, the lack of borders, there’s no reason we can’t do this, too,” Lenartz says.
So he formed Internet Capital Corp. in April, and put Byte Dynamics’ software engineers to work creating a web site called the Internet Capital Exchange. They developed an interactive system for doing an IPO, as well as for the secondary trading of securities.
The dilemma confronted by small companies in need of cash is this: traditional underwriters of IPOs are not interested in companies raising less then $5 million or $6 million, Lenartz says. Smaller deals don’t generate enough cash to support the underwriting fees.
“A traditional underwriter will charge you well into six figures in non-accountable consulting fees,” Lenartz says. “They’ll charge you 10 to 15 percent commission for every share of stock sold. And they’ll frequently force a certain amount of dilution upon you when they, in effect, force you to sell stock prior to the IPO at sweetheart prices.
“Who can afford that?”
Deborah Bortner, securities administrator for the Washington State Department of Financial Institutions, agrees that finding underwriters is among the biggest barriers to small companies’ raising capital through going public.
“If the Internet can provide markets for small businesses, then we are in favor of that,” Bortner says. “(Small business) is where the jobs are coming from, and we certainly want to encourage small companies that are giving jobs to people.”
Under Lenartz’s plan, a small company wishing to raise capital forms an IPO team of financial advisors, legal advisors and the Internet market provider, “Which is us,” he says.
Internet Capital Corp. constructs the web site that will market the company’s IPO via the Internet, and do it much more cheaply than underwriters.
But the relationship doesn’t end there.
For an additional monthly fee, Internet Capital will maintain the company’s web site on the exchange providing up-to-date company profiles, press releases and immediate contact between the company and investors via e-mail.
Further, the exchange will be a vehicle for the actual trading of the company’s stock.
On the Internet Capital Exchange, Lenartz says, sellers will list their offerings and buyers will post their offerings. A trader can call up a list of potential trade partners, choose the deal he or she wants, and fill out the transaction trade agreement, all on their computer. The other party does the same.
“Then you print out the document and send it to the escrow or clearing house to effect the trade,” he says.
The transactions are handled without commissions or brokerage fees.
“We are not competing head-to-head with brokers,” Lenartz says, “because we are taking companies they are not interested in.”
Lenartz has been quiet about development of Internet Capital Corp. over the past four months. During that time, he’s seen two competitors emerge.
One is Spring Street Brewing. It formed WIT Capital and, “have gotten the majority of the publicity in the market,” Lenartz says.
A second firm, Web IPO, surfaced a few weeks ago.
Lenartz says Internet Capital has a competitive advantage on its rivals in two areas.
First, both WIT Capital and Web IPO focus solely on IPOs and don’t offer an exchange for secondary trading of stocks.
Secondly, Lenartz says they may run into difficulties with various state securities regulators because they will, in effect, be advertising stock offerings for companies not registered in all the state jurisdictions the Internet reaches.
In order to cope with that difficulty, Lenartz says Internet Capital has developed a security layer to block access to a given company’s prospectus and solicitation unless the person logging into the web site lives in one of the states where the offering is registered.
“They’ll still have access to all the other information about the company and its products,” Lenartz says, “but they won’t be allowed to trade the stock.”
He adds that federal regulators have been quick to recognize the potential offered by Internet trading.
“The SEC is being very proactive about this and have been very positive in their rulings to allow smaller and smaller SEC registrations,” he says. “What we do does not circumvent in any way any SEC registration.”
State regulators find the concept intriguing as well.
“The Internet may very well change the way that securities are traded in the United States,” Bortner says, adding that it will offer new regulatory challenges.
“Regulators aren’t known for being extremely swift” adapting to change, she says, “but in this case, you’ve got to get on the train before it leaves the station.”
The train pulls out on Wednesday, when the Internet Capital Exchange will be ready for business. Lenartz says he is talking with two companies about IPOs, but expects the going may be slow initially.
“Obviously, we’re in the infancy of this market. But I think the growth will come, and when it does, it will come quickly.”
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