Raising Capital with Online Networks

Here’s the draft of an article we’re working on about how to raise capital with online networks. We’re particularly interested in more success stories about institutional investors who have used online networks to raise capital successfully.

We welcome feedback!

Raising Capital with Online Networks

by David Teten and Harish Venkatesh

Imagine Roger Nusbaum’s surprise when he returned to his Prescott, Arizona home to find several unsolicited messages from potential investors on his voice mail. Nusbaum, a portfolio manager at Your Source Financial in Arizona, received those phone calls because of a "blog", a journal published on the Internet.

Nusbaum is a frequent contributor to many online blogs. When Barron’s magazine recently profiled David Jackson’s network of finance blogs (including SeekingAlpha.com, ETFinvestor.com, and various industry specific blogs), they mentioned Nusbaum’s contributions about exchange-traded funds. That mention directly resulted in phone calls from some highly qualified investors, and Nusbaum has raised approximately $4m in assets directly from contacts received via his blog. “My blog really has evolved into a good source of leads, which is more than I expected when I first started,” Nusbaum commented in an e-mail to us.

Success stories like Nusbaum’s are becoming a common phenomenon as blogs and online networks are becoming a more and more important part of the business world. Using this technology, professional money managers are finding sources of capital from the far corners of the Web.

Of course, many investment vehicles are only open to accredited investors, and managers of these vehicles should not be perceived as advertising to unaccredited investors. However, there is nothing wrong with opining on market-related issues, and increasing your own visibility and investability in the process.

With new blogs appearing at the rate of 30,000 a day, and the increasing popularity of social network sites such as LinkedIn, more and more business relationships are being started and deals are being closed online. Even money managers, members of an industry known for its discretion, have been taking advantage of this new technology. LinkedIn reports numerous success stories from companies using the tool for due diligence.

Blogging (the activity of updating a blog) can significantly increase your professional profile. Greater Internet visibility results in you meeting more people, some of them potential investors. Another major advantage to blogging is that it provides a digital trail establishing your professional competence. Money managers who document their opinions of the capital markets and individual companies have made their opinions public knowledge. A potential investor is able to evaluate the ideas put forth and can determine his confidence in the money manager.

Consider the August 17th, 2005 edition of "Power Lunch" on CNBC. Jeff Matthews, a hedge fund manager at Ram Partners, and Patrick Byrne, the CEO of Overstock.com, faced off over Mr. Matthew’s criticism of Overstock.com’s strategy on his blog. Mr. Byrne has been in the media lately over his allegations that certain segments of the media, specifically the online community, are conspiring to devalue Overstock. This example shows the perceived (and actual) power of the Internet in the investment community. Mr. Matthews, by writing his opinions in a blog, is able to discuss business strategy, news and company behavior without needing one of the few scarce speaking platforms in the mainstream news media. Mr. Matthews said in an e-mail to us that, “I view my job as being to bring interesting facts to light, positive or negative, in order to generate intelligent discussion and feedback that might be useful to investors as they look for ways to make money.” Mr. Matthews plan is working, as his blog has become very popular in the online investment community.

Social software” — the family of software that people use to analyze, leverage, and enable communication in their networks — isn’t limited to just blogs. Online network tools such as LinkedIn allow business professionals to increase the scope of their network by adding second and third degree connections they might not have known existed. Without these tools, you would not know that your friend’s friend works at a fund of funds. These social network sites allow you to search a database of people you have some connection with through your own contacts. This allows you to approach people with a warm introduction instead of a cold one.

Being more visible to the right type of people increases your chances of finding people who can be relevant to your goals. Also, making yourself easily accessible allows you to be approached by potential business partners with no marginal effort, once you create a strong online presence.

Online communities are another affective way of increasing your online presence. For example, Albourne Village and the Value Investors Club are both valuable resources for professional investors.

Albourne Village, run by hedge fund consultancy Albourne Partners, is an unusual example of an online community successfully serving a busy, time-sensitive group: hedge fund investors and others interested in the sector. About 25% of their members visit the site at least once a day, which is an extremely high usage rate versus other online communities. About 85% of their members visit the site at least once per month.

The Value Investors Club (“VIC”) is another example of an online community with extremely high quality content and an intensely engaged audience. Founded in 1999 by hedge-fund managers Joel Greenblatt and John Petry of Gotham Capital, Value Investors Club is a highly exclusive club for discussion of value-based investment ideas and of “special situations” (ie. spin-offs and recapitalizations). It currently has 220 members out of a maximum allowed of 250. It is free to join, and the club management even pays a $5,000 reward every week to the member with the top investment idea.

The requirements for entry are twofold: first, write an “A+” description of an investment idea, in keeping with the site’s Buffett/Graham investment style. VIC is primarily interested in opportunities based on value or special situations. VIC receives about 100 member applications per month, of which only about 1 in 15 are accepted. Second, assuming you are accepted, you must provide between two and six investment ideas per year. The reason for the six-idea maximum is that VIC only wants your very best investment ideas.

The advantages of being known and trusted by relevant people are well documented in the academic literature. Online networks and social software are an extension of the traditional ways in which people have connected with one another face to face. Something as simple as blogging is helping Roger Nusbaum to raise capital and allowed Jeff Matthews to gain national exposure. You can do the same.

For definitions of terms related to social software please visit http://www.thevirtualhandshake.com/glossary.htm.

David Teten is CEO of Nitron Advisors (www.nitronadvisors.com), which helps hedge funds and other institutional investors make profitable decisions by giving them direct access to industry experts. You can access our Circle of Experts by phone, survey, or in-person meetings, and talk with industry executives, front-line managers, researchers, regulatory advisors, customers, and competitors from a wide range of industries, particularly technology and energy. To qualify for a free initial expert consultation, contact us at NitronAdvisors.com. David is coauthor of The Virtual Handshake: Opening Doors and Closing Deals Online, the first book on how to use online networks to find your next investor, business partner, next client, or next job. He runs a detailed blog and resource site about online networks at TheVirtualHandshake.com, and his personal blog is "Brain Food" (www.Teten.com/blog).

Harish Venkatesh is currently a student at the Richard Ivey School of Business, Canada’s top-ranked business school. He recently interned as a research analyst with Nitron Advisors. At Ivey, Harish is actively involved in the University Student’s Council, Investment Club, and is an avid tennis player.