Red Herring: Park the new venture market in Garage.com

Garage.com files for $68m initial public offering

Proving that even those with the best money connections can sometimes run short of cash, Garage.com, a matchmaker for entrepreneurs and venture capitalists, has filed for a $68m (£42m) initial public offering.

Garage.com fills a void in the vortex of the hyper-growing Web economy. Without such matchmaking services, venture capitalists and entrepreneurs fumble to match the surging flow of seed-round venture capital with the burgeoning number of new startups.

Within the last two years, companies such as Internet Capital Group, Divine Interventures, Idealab and Garage.com have taken center stage to become the middlemen for deals between entrepreneurs and venture capitalists. Idealab will file its plans to go public within the next few weeks, according to industry sources.

Some of these companies provide incubation services for startups, and include everything from office space to staffing. These services come at a price, however, which typically includes a stake of around 20 percent in the company and a seat on the board.

Garage.com's approach is less intrusive, though. The business model is somewhat similar to an insurance or real estate agency. The matchmaker itself isn't really necessary. However, if a company like Garage.com can relieve the headaches caused by entrepreneurs shopping for money and venture capitalists looking for promising startups, then the commission will be worth it. Garage.com's typical round of seed funding is in the $500,000 to $5m (£310,000 to £3.1m) range. That compares with $9m (£5.6m) for the average round of investing from the venture industry.

The company says that its 30 employees have reviewed 1,800 detailed applications from prescreened entrepreneurs. From those that passed muster, the employees met with several hundred startup teams. Through the end of 1999, it funded 40 companies with $101m (£62m).

Garage.com says that it shoots for a 5 percent commission on the venture proceeds. However, its "placement" revenues of only $2.5m (£1.5m) for the year indicate that the average placement fee was only around 2.5 percent. The company also buys about a 5 percent stake in the companies it funds.

Last year, Garage.com earned $694,000 (£430,280) on $5.9m (£3.7m) in revenue. Nearly half of that was from matchmaking fees -- most of the remainder came from fees for a conference called Boot Camp for Startups. However, the two-year-old company has also accumulated an $810,000 (£502,200) deficit, and states in its prospectus that it expects to incur significant loss for the foreseeable future as it expands operations.

"Garage is going public, largely on the value of the warrants in its portfolio," said Stephen Pelletier, chief executive of rival Offroad Capital, speaking about the warrants Garage.com receives for shares in its portfolio companies. "The market is seeing that a portfolio of such investments will have a few home runs."

Offroad differentiates itself from Garage.com in that it prefers to broker later stage financing rather than seed rounds. And most of the equity it places is from wealthy individuals, rather than venture capitalist firms. Offroad, which funded its first three companies in the fourth quarter of last year, already has 120 employees, according to Pelletier.

Several other companies do make a business of introducing entrepreneurs and venture capitalists. They include Seedstage Capital, Vcapital.com and the events division of Red Herring.

Garage.com, which is based in Palo Alto, California, is well aware of the competition, and is just as aware that there are plenty of bright, hungry entrepreneurs beyond the confines of Silicon Valley. Yet largely due to the fact that most venture capitalist firms are headquartered in Silicon Valley, 40 percent of all their investments made in the first three quarters of last year went to companies based in the area.

During the past few months, Garage.com has expanded its presence to Seattle, Boston, Austin, Israel and London. Despite opportunities in many other regions, the company says that it is too thinly capitalised to conduct a major expansion without an IPO. It plans to use the offering money to hire more people and open more offices.

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