Marriage broker introduces little guys who need money to those who have it

Privately held Princeton Photo Network, founded last March, was looking to roll up some regional wedding and portrait photography studios.

But the $7 million it needed was too small a placement for traditional investment banks, which typically pass on deals of less than $10 million, and too unglamorous for most venture capitalists, who overwhelmingly prefer tech start-ups.

So the New Jersey company turned to New York-based CapitalKey Advisors. Poring through its database of 3,000-plus private equity and venture capital funds, the online investment bank found financing for Princeton Photo.

Launched in early December, CapitalKey is capitalizing on two growing trends: Catering to small-business owners over the Internet, and pairing companies needing expansion capital with those who have money to risk.

The former is “a quickly emerging area of the web,” says Eric Klein, a small-business analyst with the Yankee Group, a Boston research firm.”Start-ups are springing up like mushrooms to provide tech-savvy entrepreneurs with ideas on how to run their businesses and information on where to get capital.”

mushrooming field

Indeed, companies like Loanwise.com, which caters to small businesses needing instant loan approvals, and Smart Online Inc., which provides small businesses more than 2,500 legal forms and step-by-step business plans at its site, are quickly proliferating, says Mr. Klein.

So are web start-ups that are creating new ways for companies needing money to find it. Off Road Capital, Garage.com and Nvst.com Inc. link cash-strapped private companies with individual investors hungry to get in on deals previously inaccessible to them. W.R. Hambrecht & Co. was formed to sell stock in IPOs via web-based Dutch auctions, to give companies fairer pricing.

CapitalKey is the first to bridge the gap between small business owners and the sundry investment funds competing for deals that meet their distinct criteria, says Yankee Group research analyst Jim Baird.

It’s a market that’s needed tackling, says David Bloom, the 50-year-old CEO of Princeton Photo, which ultimately received its funding from Sagaponack Partners, a Manhattan-based venture capital firm listed in CapitalKey’s database.

“The average entrepreneur may know his business, but unless he has a background in finance, he doesn’t traditionally come into contact with venture capital or even know, in a lot of cases, that a whole industry exists there,” says Mr. Bloom.

Adviser Richard Bregman, president of MJB Asset Management in New York, calls it a “good service” but says he’d need to do some “due diligence before I recommend CapitalKey to clients” looking to fund their businesses.

Adds Ron Rutherford, another Manhattan adviser: “There are all kinds of people in corporate America who want to start their own business,” he says. “An investment bank that helps these folks accomplish what they set out to do sounds really helpful.”

CapitalKey — started by former investment bankers Neal Goldman, 29, and Steven Turner, 31 — was formed to do away with numerous inefficiencies in the private capital markets, including the inability of most investment banks to cater to small business.

“Investment banks work on deals with many more digits” than the crowd to which CapitalKey is now catering, explains Mr. Turner, who came from Bear Stearns Cos. Inc. “When someone whose deal is too small for a Bear Stearns comes to you, it’s frustrating. No one there knows where to send them.”

too small or too busy

Another problem, says Mr. Goldman, an alum of Lehman Brothers Holdings Inc., is the sheer number of private equity and venture capital funds in existence.

Many are either themselves too small to locate the types of companies they want to see or, alternatively, too inundated with the wrong types of companies to see straight.

Andy Russell, principal at venture firm East River Ventures in Manhattan, attests to the problem: “We see about 120 deals a week coming from lawyers, investment banks, deal brokers.” The influx “gives us a lot of deals in our sweet spot. We also see a lot that don’t come near it. It’s completely overwhelming.”

database-investment bank

CapitalKey’s operation is pretty straightforward. In an atmosphere that’s part investment bank, part massive database, CapitalKey has its clients submit business plans online, then targets funds that have invested in their clients’ particular areas before, sending out e-mails to the funds to gauge interest.

Its approach is allegedly risk-free as well. The firm, which charges underwriting fees of between 5% and 8%, isn’t paid unless it completes a transaction for the small business owner. In some cases, it even shares the fees it garners: anyone referring business to CapitalKey that ultimately results in a deal receives up to 15% of CapitalKey’s cut.

John Durrett, 31, the CEO of Atlanta-based online municipal bond seller Muni Direct.com, says the process is working well for him. “CapitalKey controls the keys to the kingdom, but they are providing a hugely unique service.” He was about to meet with representatives of one of the several dozen funds identified by CapitalKey as likely to invest in his business.

Outside of approving the list CapitalKey provided him, Mr. Durrett says, he’s had little to do other than say “Go.”

CapitalKey has closed just two deals so far, but Mr. Goldman and Mr. Turner hope that about 250 companies yearly will engage it to represent them for placements of $3 million to $20 million or, for mergers and acquisitions, up to $100 million. They say CapitalKey has already been approached by more than 1,000 small-business owners looking for funding.