Tim Hogan has devised a way for cash-hungry small businesses to get financing without groveling to banks or venture capitalists.
The chief executive of Michigan-based Commonwealth Capital Advisors now has to convince a legion of independent lawyers, accountants, and other professionals who advise small businesses to join his bid to overthrow the status quo in initial-stage, equity funding.
“We’re attempting to revolutionize the way startups receive capital,” says Hogan, 47, a former stock-brokerage compliance officer.
“Everyone puts together a business plan and goes schlepping to the financial institutions,” Hogan says. But “the bank is only going to lend you as much equity as you have in your house. And going to a venture capital firm is a joke. There is an immediate conflict of interest. VCs must make the most money they can for their investors; it’s their fiduciary responsibility. So they squeeze as much flesh out of a company as they can without killing it.”
Hogan and Charles Dreher, 59, Commonwealth’s executive vice president, hope to enlist lawyers and accountants who counsel small companies to sell their $499 software product. Financial Architect System enables business owners to raise unlimited amount of funds from family, friends, business associates, and angel investors through a Regulation D filing, and $1 million to $5 million in a 12-month period from any parties via Regulation A. The software cuts the filing costs from $50,000 to $2,000.
Why should lawyers and accounts bother to sell the product? They’ll get a 20 percent commission and about $1,500 in fees to review the documents. By helping grow a client’s business, they’re securing and promoting the growth of their own.
The challenge Hogan and Dreher now face is how to build a network of 1099 “salespeople” and an in-house executive and administrative staff to support them.
The Mother of Invention
In 1993, Hogan’s step father asked him to come to Harbor Springs, Mich., an affluent town where auto executives “summer,” to raise capital to build a golf course. At the time, Hogan was an SEC compliance officer for a Midwestern securities firm with 200 employees.
Hogan put together a private-placement offering that raised $3 million, oversaw construction of the golf course, and became its chief executive. Aspiring business owners who learned of his capital-raising experience later began coming to him for other private placements.
Between 1998 and 2002, Hogan put together documents for 24 private placements, which ranged from $500,000 to $20 million. Seventy-eight percent of his clients raised all the capital they were seeking, Dreher says. “By comparison, only 1.5 percent of the folks who go to VCs get funding, and the rest get nothing.”
In 2003, Dreher joined Hogan to start Commonwealth. Since then, Hogan says he has spent $500,000 of his own money and $400,000 of investors’ on market research and product development.
The software is almost ready for release after 18 months in development and beta-testing by small firms recruited at university incubators. Along with directing the user through the process, the software includes a link to an accredited angel-investor portal where applicants can submit their documents for potential funding.
“With our software,” says Hogan, “if you have $500 and a brain, you can create a $25,000 document in about 20 hours, and then spend $1,500 to $2,000 for a professional to look it over.” Compare that to $25,000, which is what Hogan typically charges to handle a Regulation D data collection and filing, and $50,000 for Regulation A filings.
Bell, Boyd & Lloyd, the nation’s sixth-largest securities law firm, reviewed the product and determined it is patentable, and Commonwealth now has domestic and international patents pending, Dreher says. “A former SEC enforcement [official] marveled at it, and we’ve gotten testimonials from four major Chicago-area universities.”
Growing the Company
At present, Commonwealth consists of five employees — Hogan, Dreher, Chief Operating Officer Nicole Ryan, and a vice president of corporate finance and one for business development. Hogan hopes to hire a new COO and redeploy Ryan as chief financial officer.
He plans to continue offering full-filing services for business owners who decide, after buying the software, to leave it to others. For that purpose, Hogan and Dreher intend to recruit and train about 10 “document-production” employees.
“We’re looking at retired school teachers or paralegals,” says Hogan, who has never done any hiring before. “I don’t think we want a bunch of people in cubicles doing this, so we may let everyone work out of their homes.”
At the same time, Hogan suspects it might be better to have those employees on staff rather than as contract employees. The reason: He’ll have no control over their time, which means they may not be flexible enough to take on more work during busy periods and growth spurts — two developments Dreher can’t wait to experience.