1Mby1M Deal Radar 2011: CapLinked, Manhattan Beach, California

My regular readers may be surprised to the see the subject of today’s 1M/1M Deal Radar. For the past three years, Deal Radar has been covering companies that have at least $1 million in annual revenue. It’s an important milestone that we take seriously. So why CapLinked, a pre-revenue company? Well, primarily because it’s a company that has been misunderstood as financing exchange, and to give the 1M/1M entrepreneurs a clear view of what they really do. CapLinked is an online platform for private companies, investors, and their advisors to collaborate, manage a capital raising or asset sale, and exchange updates.

CEO Eric M. Jackson ran PayPal’s domestic marketing from 1999 to 2003. His focus there was product marketing and strategy, and he oversaw PayPal’s monetization campaign, the roll-out of its debit card, and its competitive marketing vis-à-vis eBay’s Billpoint service. After eBay acquired the company, he and a PayPal colleague co-founded World Ahead, a media startup, which they later sold in 2008. He is also the author of The PayPal Wars. Co-founder Chris Grey is CapLinked’s CFO. Grey has 16 years experience in investing, private equity, and real estate. He started two companies (Third Wave Partners and Crestridge Investments), was the managing director at Emigrant Bank, and is a columnist for TheStreet.com.

One day Jackson and Grey were comparing notes on investment in private companies. As a former first-time CEO, Jackson was reminiscing about the difficulties of raising capital for his business and managing investor relations. Grey retorted that as an investor it was hard to get visibility during the due diligence process and even harder to get updates once he handed over money to an entrepreneur. Suddenly, a light went on: Software could make this process better for both sides.

The goal of CapLinked is to make private investment easy, secure, and social for two major groups: investors and entrepreneurs. Entrepreneurs can use CapLinked when they’re raising money to host a deal room, monitor who’s viewed their due diligence materials, and keep track of their prospective investors. The site also has tools for investor relations for those entrepreneurs who have closed a deal.

Investors can use CapLinked to review due diligence materials, share deals with their advisors, and syndicate deals to other investors. After the investment is done, they can manage their portfolio of private investments and receive updates through the CapLinked site.

Many people in the tech world equate “private investment” with angel and VC investing in Silicon Valley, which is not strictly accurate. And while that’s part of private investment, the space is much larger than that. It includes every industry in the economy (not just tech), and investments come through private equity funds, hedge funds, family offices, boutique investment banks, broker-dealers, and many other sources.

About 600,000 businesses get created every year in the U.S., and the total amount invested annually into private companies is estimated to be $384 billion. Approximately 20 million people are involved in private investing as investors, entrepreneurs, and advisors. Worldwide, that total exceeds 200 million people and $600 billion.

On the company side, CapLinked’s initial target market has been technology startups because they’re early adopters and highly networked. But it has also seen usage in industries as diverse as real estate, media, and energy. (When the company started seeing commercial real estate deals on the site, this prompted it to add “asset sale” as an option when creating a deal.)

On the investor side, obviously there are angels and VCs on the site. But CapLinked has also seen interest on the part of fund managers, financial advisors, and broker-dealers. The company says that several investors have used its deal room feature to raise money for their funds.

CapLinked is a freemium service and plans to roll out premium accounts later this year that will give companies additional tools to manage a closing online, collect digital signatures, send video messages, and integrate with QuickBooks. The cost for these accounts will average $15 to $25. Down the road, the company will also introduce premium accounts for institutional investors and broker-dealers. The pricing and feature set for those accounts are still to be determined. As the user base scales up, it will introduce Mint.com-style lead generation; i.e., suggestions for service providers and products that users will find helpful. The company says that this diversified approach will allow it to always keep the core product free, which is important for scaling up the business but also for philosophical reasons: “It’s wrong to charge startups and young companies that are just getting started money in order to raise capital,” say Jackson and Grey.

CapLinked currently has 6,000 users, which includes more than 1,500 investors. There are more than 3,400 company profiles on the site, and the company recently passed $1 billion in potential deals.

The company has raised a total of $875,000: a seed round of $350,000 in June 2010 and an angel round of $525,000 in January 2011. Investors in the angel round included Peter Thiel (co-founder of PayPal), Dave McClure (managing partner of 500 Startups), Joe Lonsdale (co-founder of Palantir), and Aman Verjee (CFO of Sonos). CapLinked is currently doing a follow-on round with a convertible note. The ideal investor is an angel or seasoned investor who brings industry experience to the table, who’s invested in private companies before and therefore understands where the efficiencies in the process are. CapLinked requires all its investors use the CapLinked website to receive updates about the company. Says Jackson, “We want them to experience the software just like a user does, and to offer us feedback on how to make it better.”

According to the founders, “Private investment by and large is still in the technological stone age. While Fortune 500 companies and Wall Street have expensive enterprise tools like IntraLinks to help them manage deals, private investors have to rely on e-mail and spreadsheets. Occasionally companies and investors will hack collaborative tools like Google Docs or Dropbox to help with deal flow and portfolio management, but there hasn’t been a collaborative online platform to make the process easier.”

Salesforce.com has a CRM product that is designed for investors, and there are a few other enterprise solutions out there, but CapLinked claims that these are all too expensive, have poor user interfaces, and are closed platforms. There are several other services that I think are doing a good job to help create a more democratized capitalism. These include SecondMarket, Kickstarter, ProFounder and Invested.In. The latter three specifically focused on crowd funding, while the first is more of a brokerage.

As CapLinked scales up, the founders believe they will be creating a valuable and profitable business that could succeed as a standalone entity. “If we succeed in executing our vision, we’ll likely receive acquisition offers since no one has ever ‘mapped the investor graph,’ and that will be an attractive value proposition,” say the founders. “But it’s extremely premature for us to be talking about an exit; we need to revolutionize the field of private investment first.”

Recommended Readings
Capitalism 2.0: Distributed, Democratic Capitalism
Seed Capital From Angel Investors: AngelList Founder Naval Ravikant

This segment is a part in the series : 1Mby1M Deal Radar 2011