The Offroad Stock Market

Patchlink.com, a small software services company, last November set out to raise several million dollars, offering shares at $3 apiece. Like other Internet stocks, the proposed offering price immediately crept higher. Over the next few weeks, it inched ahead, peaking at $4.57 a share, more than 50 percent above its original offering price.

What makes Patchlink's story unusual is that the stock isn't traded on Nasdaq; Patchlink was driven higher by a group of rich investors participating in an exclusive Net-based auction.

The force behind Patchlink's offering is San Francisco-based Offroad Capital.

Through Offroad, wealthy individuals from around the country were able to bid for a stake in Scottsdale, Ariz.-based Patchlink. That's a striking contrast with the closed-door world of venture capital.

"It's traditionally a matter of who you know," says Stephen Pelletier, Offroad's founder and CEO. "The right thing to do is to bring it into the sunshine."

Which isn't to say Offroad's model is a model of investor democracy. Under federal rules, only accredited investors - those with assets of $1 million or more - can participate in private placements. And no more than 500 investors can participate in any single round.

Nonetheless, Offroad's approach is a radical departure from traditional venture capital. The idea is to allow Offroad's several thousand registered investors to set a company's share price, not unlike the way bids on eBay set the price for Beanie Babies. In the Patchlink auction, investors couldn't see individual bids, but they could track the rising aggregate value.

Offroad also is working to provide a secondary market. Today, the only ways an investor can liquidate a stake in a privately held company is through an acquisition or an IPO. But Offroad plans to hold regular auctions to allow investors to sell their shares.

Expand the concept far enough, and it could challenge the traditional venture capital market. "If Offroad creates a perfect electronic marketplace," says Jay Hoag, a general partner at Technology Crossover Ventures, "then I don't have a business."

VCs, however, aren't losing any sleep over it. For one thing, Offroad so far has only completed three deals. (A fourth is in the works.) Some question whether Offroad will ever be able to generate sizeable revenues; it charges a fee of roughly 6 percent and so far has not been able to land any deals of more than $6 million. And the companies that fit Offroad's model are limited, since it requires companies to have customers and revenues - which isn't true for many Net startups.

Guy Kawasaki, the founder of Garage.com, raises another issue. "As much as I love democracy, I don't think the founder of a hot startup is going to be saying, 'How can I get that dentist in Des Moines to invest?'" Kawasaki says.

"[The entrepreneur] wants money in one lump sum, not $50,000 from 122 individuals."

Pelletier acknowledges that Offroad will have to compete with VCs who offer connections, publicity and other resources. But the Patchlink deal shows the attraction: cheap capital.

Last summer, when the company started to look for outside financing, it reached out to a host of VCs, with limited success. The 9-year-old company, which provides software updates - called patches - that can be downloaded from the Web, has been profitable for several years, says Sean Moshir, CEO of the 23-person business. One large venture firm, which he won't name, offered to invest $4 million in return for a controlling stake. A few months later, Moshir raised $5.6 million through Offroad while maintaining majority control.

Offroad's auction process differs significantly from the Dutch auction process used by the investment bank WR Hambrecht & Co., which takes sealed bids, preventing investors from reacting to each other's offers.

Says Pelletier: "Investing is social, with bankers talking to each other on the phone and individuals talking to their friends and families to determine value.'' Bidding in an open auction, he says, is the ultimate way for investors to see how others value a company. "That is how a market is made."

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