The ongoing government shutdown may be restricting some from applying for small business loans via the Small Business Administration, but entrepreneurs have some other options for getting their businesses off the ground.
Last month the Securities and Exchange Commission lifted its 80-year-old ban on soliciting capital and advertising online, opening the floodgates for entrepreneurs looking to raise capital. Now entrepreneurs can solicit capital from the 8.7 million accredited investors in the country, good news at a time when leveraging funds as a startup is hard work, to say the least.
What the ban had outlawed was not quite crowdfunding, says John Callaghan, co-founder of iCrowd, which soon will allow users to invest small or large amounts of money into business plans profiled on the site. Callaghan says the idea behind iCrowd is a web community of entrepreneurs and investors sharing ideas and collaborating on projects. He says the company vets the projects it lists before making them available for investors to fund.
While the SEC ban being lifted is great news for entrepreneurs, investors will have to do more of their own research before choosing what projects and ventures they want to fund. With the ban lifted, businesses now have more advertising freedoms, and potentially could use unethical marketing tactics to raise cash.
“Now we are going to have advertising for companies, and a lot of them are going to sound really great, and a lot of them may very well be great,” Callaghan says. “But you are going to have individuals that are not qualified say, ‘I want to get in on that too,’ and perhaps fib about their qualifications to investors.”
Here are Callaghan’s three steps to crowdfunding online:
No. 1: Do the upfront work. Preparing, planning and articulating are of paramount importance for entrepreneurs seeking funding via a platform like iCrowd, Callaghan says.
“You want to do it right,” he says. “So when you come to investors, you have to put yourself in their shoes, and you need to build trust. If you haven’t done the ground work of getting all your documentation together, and what it takes to communicate to investors before you begin the process, you will not be successful.”
This is key to creating trust and continuing your relationship with these funding partners, he says.
No. 2: Create relationships. Those financing ventures are no longer at a distance from their investments, Callaghan says. Having positive connections with these investors means you can continue to work together and will be able to come back to them in the future for more financing rounds.
“With social finance people have a more direct communication with the entrepreneur, and the entrepreneur has more of a chance to build a customer base from these people who are enthusiasts,” Callaghan says. “For most companies, this is not the only time you will need money. If you have a loyal base and established close ties, you will be successful.”
No. 3: Don’t overpromise, and be realistic. When attempting to raise cash it’s easy to fall into the trap of over-promising results, Callaghan says. The better approach to take is being honest with potential investors.
“The thing is that we wouldn’t be successful if we weren’t optimistic,” Callaghan says. “But at the same time, don’t promise the moon to investors, particularly if it’s unachievable, and then realize there are risks you have to deal with.”
Being candid with investors is a surefire way to develop that all-important trust with those funding you, he says.