innovate arkansas

It’s an age-old problem: venture capitalists worry about their sometimes risky investments, and entrepreneurs seek investors who might buy into their dreams.
With the official launch of its Web site on Jan. 15, the Fayetteville software company EquityNet has compiled more than three years of research into tools that weigh the potential risks and returns of companies seeking investors.
In essence, the tools offered by the firm perform the due diligence phase before a partnership, investment or acquisition is made with a company.
EquityNet is headed by CEO Ron Goforth and Chief Technology Officer Judd Hollas.
As president of Fayetteville’s Economic Development Council, Steve Rust sees about half dozen or so startups in the city per year.
Maybe 30 percent are successful.
He’s been eyeing EquityNet for more than two years and he believes it will be among the successful.
“This has the potential to change the business world significantly,” Rust said. “It’s a quantum leap in connecting entrepreneurs and investors and it’s coming at a very opportune time for Northwest Arkansas.”
The key component, called the “enterprise analyzer,” will be offered free of charge through March 15 to help get the Web site off the ground.
After the launch it will cost $149 for a first visit.
Once everything is in place through the Web site’s expansion, EquityNet said its technology will be able to address a two-fold problem: Young enterprisers needing capital have difficulty finding investors and investors who want to identify the most probable, and most profitable, companies to fund while also determining what level of support may offer optimal return.
“It’s going to provide a service to an area that’s in a desperate need for rationalization and improvement,” said EquityNet CEO Ron Goforth. “And that is the way that investment money finds appropriate places to go home.”
An E-Venture
Venture capital is a type of private equity typically provided from outside investors for financing new, growing or struggling businesses.
In 2006, there were 58 venture-backed initial public offerings nationwide raising $5.3 billion and 335 merger and acquisition transactions with a total disclosed value of $16.6 billion, according to data collected by Thomson Financial and the National Venture Capital Association.
That money may never find “a home,” as Goforth put it, if it were not for referrals from friends or colleagues or chance encounters at a golf club or social event.
The minds behind EquityNet, through a series of phases, claims it will be able to bridge the gap between investors and entrepreneurs, expanding the horizon for potential deals from coast-to-coast and beyond.
“Before, the meeting would either happen by chance or the investor’s accountant or lawyer calls with someone they know,” Hollas said. “Any entrepreneur looking for capital or any investor looking for an enterprise investment can come to EquityNet and use our patent-pending system to find each other very efficiently.”
There are five external investors in EquityNet: two from Fayetteville, one from Rogers, one from Little Rock and another from Austin, Texas. So far, about $800,000 has been invested in the company, which apparently would score high on its own tools.
“The potential reward is very, very high,” said Goforth, who along with Hollas has invested plenty of his own time and money in the company.
Because it will be offered free for the first two months, EquityNet and its investors don’t seem in a hurry to see a return, which usually results in staying power of a company.
Rust believes it will be successful because it will be beneficial to both venture capitalist and entrepreneurs while changing the way people do business or search for deals.
“Say you are interested in a new startup in medical devices,” Rust said. “There are maybe a thousand of those kinds of companies out there. If you use this, they will be able to identify 10 companies or more that are most likely to succeed based on the criteria that’s embedded in the software.”
Site Layout
Phase I includes EquityNet’s enterprise analyzer, which helps investors compare a company to hundreds of others before deciding whether it’s worth the risk.
The process that can take weeks, will take minutes.
An investor can listen to an entrepreneur’s idea from one of those chance encounters and then pass along his EquityNet investor access code, which will walk the entrepreneur through the process of entering information into the Web site with a series of detailed questions.
Once completed, the investor will receive an e-mail that their enterprise analysis is ready.
Results are available within minutes.
The reason this technology can provide accurate predictions about a company’s likelihood for success or failure is based on statistical correlations in characteristics with more than a half million real companies.
Hollas spent the past three-and-a-half years compiling 10 categories of statistical information (such as facts about management experience and education) from each company into what’s called a knowledge base, which works hand-in-hand with the enterprise analyzer.
“So we get a very detailed characterization of a company,” Hollas said. “Everything you would want to consider as far as risk and return, because that’s what every investment is all about.”
Phase II includes an “E-marketplace” that matches investors with entrepreneurs of similar interests, much like the online dating service Match.com pairs potential mates or how Lending Tree connects loan seekers with lenders.
EquityNet also will weed out companies with low probabilities for success, making a meeting more meaningful because it pits only serious investors with serious companies.
Rust said EquityNet will greatly enhance the number of deals an investor can screen while also improving chances for success in areas the investor may not be familiar, such as a real estate developer who wants to branch into, say, biotechnology.
“Using this tool, they should be a lot more comfortable and have more confidence,” Rust said. “That’s why I think it will have success. But how much? I don’t know.”
That depends on participation, according to Hollas. He said the free period is meant to spur interest while also accelerating the population process.
The more members, the better EquityNet will work for both investors and entrepreneurs.
“Like Match.com, whichever side inputs the most, the other side gets the greater benefit,” Hollas said.
“If you signed up for Match.com and there weren’t very many women from Northwest Arkansas, it wouldn’t be a great benefit to the men.”