Who wants to be an internet millionaire?

Who wants to be an internet millionaire? Almost everybody, it seems, if the flood of mail reaching the offices of City venture capitalists each morning is anything to go by.

One estimate puts the number of ebusiness plans sent out at one thousand per month. However, most of these are simply not cunning enough to put tails on and turn into weasels.

But even that figure may be an underestimate. Durlacher, the stockbroking firm that has turbo-charged its share price by acting as an internet incubator, reports that it alone receives "hundreds of unsolicited proposals" every day.

It also says that only around one in 20 of these gets past the most basic due diligence exercise. So the proposals of most would-be ebusiness millionaires end up being filed in the rubbish bin.

Even so, there is lively activity on all fronts, particularly in the AIM and Ofex markets. ActiveIntranet, for example, a company with a software suite that enables companies to build intranets, raised £2.1m on Ofex, valuing it at £11.6m.

Meanwhile, internet and media incubator and investment company Cube8.com's flotation on AIM was four times over-subscribed, with the amount raised rising from £7m to £10m. This valued the firm at £55m.

Finding that Midas touch
So what separates successful ebusiness proposals from the hundreds that never make it? One thing is clear: the rules of business aren't suspended just because the company is a dotcom, although the judgement of investors may be.

"The disciplines of putting a well-supported business plan together are the same for the manufacturer of widgets as they are for a dotcom company," said Malcolm Holt, managing director at Matchco, an internet service that is intended to put entrepreneurs in touch with venture capitalists.

"The structure for doing the business plan is no different," he added. "But, on the other hand, the funding sources have a great appetite for new opportunities that are ecommerce related."

Quintin Barry, a partner at Deloitte & Touche Corporate Finance, agreed that it is important to present a well-researched business plan to venture capitalists. "Would-be entrepreneurs need to get the fundamental building blocks of their business in place," he said.

"They must identify a business model which can be profitable, and be able to explain why it is a sensible model and why it is one in which there are barriers to entry for other competitors," he added. "I would expect to see a business plan that had been researched and market tested, and also a plan that had something unique about it."

Barry said that one of the biggest weaknesses of many ebusinesses is failing to put together a balanced business team. "We often see proposals that don't have sensible management teams behind them. They don't have the experience to carry off the proposition they're making, and the rules of venture capital don't change simply because they're a dotcom," he said.

An exit strategy is another key aspect of the kind of plan that venture capitalists are looking for. Increasingly, they want an early exit. "I think the importance of getting out quickly comes down to being able to defend the position of the company they're investing in," said Barry.

Defence might involve using either cash or paper to buy rivals, or being able to move to a position where venture capitalists' initial investment becomes tradeable.

But according to the latest Deloitte & Touche Private Equity Confidence Survey, nearly three-quarters of venture capitalists expect to make funds available to firms developing an internet strategy.

Barry said there are two distinct situations, however. The first is the dotcom startup, and the second is where an established business is developing an internet presence by converting itself from a bricks and mortar to a clicks and mortar business.

Barry suggested that the number of pure dotcom transactions has doubled or trebled over each of the past three years, with the money being spent on each transaction increasing by similar amounts. "The result is that this year the amount of cash invested by venture capitalists in dotcoms will be many hundreds of millions of pounds," he said.

Many venture capitalists are also waking up to the fact that they have made historic investments in companies that may see their future compromised if they don't develop effective internet strategies. Hence the growing interest in funding clicks and mortar deals.

Yet despite the rise in the number of both clicks and mortar and dotcom deals, there are complaints from both entrepreneurs and venture capitalists that they don't understand each other.

No track record
One of the problems that Matchco's Holt identified is that many dotcom entrepreneurs are too young to have had time to develop a track record, or build the kind of management team that would give venture capitalists the warm glowing feeling that comes with knowing their money will be safely husbanded.

"If you go back in time, somebody who was launching their own business would probably be older and have already learnt the tricks of the trade in their market," said Holt. "But because of the relative ease of moving into ecommerce, you tend to get one or two people coming forward with an idea."

This raises another issue: whether entrepreneurs are seeking startup or second-round funding. "The second kind of funding requirements are more in line with what funders in the UK are used to," said Holt.

Dotcom entrepreneurs have also complained that venture capitalists don't understand the unique nature of ecommerce. Certainly, there might have been a lot of truth in that contention two years ago, and perhaps some truth in it last year, but venture capitalists have shot up the ecommerce learning curve at a rate of knots over the last few months.

Despite this, there is still a mismatch in one crucial area: the scale of investment needed for a startup. The days when a venture capitalist couldn't be bothered to look at anything under £50m have started to change, but only slowly.

Few recognise, however, that the funding requirements of a business built on ideas and knowledge will be fundamentally different from one founded on buildings, plants and machinery. This means that the industry needs to find ways to fund more small deals, more cost-effectively.

But UK venture capitalists will need to get clued up on this pretty swiftly. Their US counterparts are currently eyeing the European market for bargain deals because the cost of investing in the US market is now sky high. "They understand the market and it's cheaper for them to buy their investments," warned Holt.

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