A seal of approval for small-company investments
A new service aims to give private companies financial credibility similar to that of public ones, so they can raise money in the public market.
NEW YORK (FORTUNE Small Business Magazine) - When he needed more than $3 million to expand BetterWorld Telecom, his fast-growing communications services company, Jim Kenefick was wary of turning to the venture capital firms he had tapped for earlier startups.
"VCs have their own agenda and time frame; they sometimes force companies to do things they wouldn't want to do," Kenefick says. "The original shareholders often don't get the bite out of the apple they thought they were going to get."
Kenefick found an alternative through Entrex, a new service that plans to help small private companies raise capital.
The idea behind Entrex -- short for Entrepreneurial Exchange -- is simple. If private companies can offer financial credibility similar to that of public ones, they too can raise money in the public market.
That's exactly what two-year-old BetterWorld, of Washington, D.C., plans to do this spring. After Kenefick completes Entrex's rigorous screening process -- a kind of financial Good Housekeeping seal of approval -- he expects to raise that $3 million by selling 20% of BetterWorld to a new mutual fund called Symphony Development.
Symphony (www.lyriccapital.com) will be a $200 million publicly traded fund of private companies, whose individual financial performance will be reported quarterly.
"We thought that the public market would accept a fund of private companies if we could tell them exactly what they are buying," says Symphony's CEO, Terry Temescu, 58. Symphony will consist of minority stakes -- from 5% to 35% -- in 35 "Entrex Ensured" companies (Symphony is still in the planning stage; it needs SEC approval to raise money through an initial public offering -- never a sure thing -- before it can start channeling money to small companies, hopefully by this spring.)
That's not all. Entrex (www.entrex.us) is in talks with five Wall Street firms, including VFinance, that hope to launch private-equity funds this year. Through these, "Entrex Ensured" companies would sell to retail investors stakes that could be worth a total of $1 billion.
"Until now it has been too expensive and time-consuming for private-equity managers to research small companies," says Entrex founder and CEO Stephen Watkins. "Our stamp of approval should give investors the confidence to include private companies in their portfolios."
A serial entrepreneur, Watkins, 44, lives on a yacht off Lighthouse Point, Fla., and dresses like a Wall Street banker. (He also was a judge for FSB's student business-plan contests.)
As he nurtured eight startups over the years, he grew frustrated by the inefficiencies of raising capital. "When I was raising money for my first company in Chicago in 1984," he says, "all I could do was call my local accountant and lawyer and ask them to find investors."
A year ago Watkins started working on a system to evaluate private companies. He arrived at a six- to eight-week screening and valuation process that companies such as BetterWorld undergo to become "Entrex Ensured." The pricetag: $75,000.
How does the process work? Entrex doesn't make a judgment on whether a company is a good investment. Instead its calculations will give investors reliable information while guaranteeing an entrepreneur a fair assessment of his company's value.
"It's like going to the doctor for a physical," says BetterWorld's Kenefick. Entrex's evaluation is best suited for firms that have at least $2 million in annual sales and want to raise $2 million or more. Symphony's companies boast an average of $10 million in annual revenues and 25% growth.
Entrex, based in Chicago, hopes to generate $30 million in revenues this year. But the startup faces considerable challenges. For one, not all entrepreneurs are eager to open their books.
Says Daniel Marcus, CEO of Digito Properties (www.digito.us), a real estate investment company in Austin: "If any investor can see your information, any competitor can see it."
Another sticking point: "Watkins is trying to do something ridiculously ambitious by taking the basic philosophy behind reporting and disclosure down to private companies," says David Weild, a former vice chair of Nasdaq and now CEO of the National Research Exchange (www.thenre.com), which provides independent research on public companies.
Watkins' success will depend on how many firms are willing to bare their financial souls in exchange for a dollop of liquidity.
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