The financial crisis has hammered many industries, but it has sparked strong growth for Internet sites where small businesses can find investors and lenders online.
“Since September, we have seen a considerable rise in traffic to our site,” says Robert Bertsch, president of RaiseCapital.com, which matches small businesses with potential investors.
“Because traditional avenues for businesses to find investors are so broken down, more people are looking at us as an alternative. And on the other side, investors who have seen their capital diminish [in financial markets] are looking for something close to home where they can kick the tires.”
Remember that entrepreneurs without a solid business plan are no more likely to receive money online than off. Also be aware that many unsavory characters lurk around the Internet, trying to separate users from their wallets, business ideas, etc.
But the overall picture is rosy. The way it works on RaiseCapital and other sites is that small businesses present a description of themselves and what kind of investment or loan they seek. Then investors or lenders who read the description can contact the business via e-mail. On some sites, small businesses themselves can initiate contact with investors or lenders.
Some sites, including RaiseCapital, allow no-frill listings by businesses for free. But most service providers charge a monthly fee of $10 to $40 for companies that want a prominent listing or the capability to contact potential investors.
More willing to take risk
Justin Fontenot, president of Symmetric Healthcare Staffing, a temporary nurse agency in Abbeville, La., thanks an Internet loan for getting his business off the ground.
He founded his company in 2006, but couldn’t begin operating without a loan. Fontenot, a former nurse himself, needed that money to pay his nurses until his clients paid their bills to him.
“We had tried to find banks, but they considered it too big a risk, especially since we had no revenue yet,” Fontenot says. “That wasn’t a feasible option.”
Through a Google search he found GoBigNetwork.com and posted a brief description of his business along with a loan request. “We just gave very basic information, because we didn’t think it would get us anywhere,” Fontenot says.
Within a week he was contacted by someone at a funding company. “We’d never even considered funding companies before,” he says.
But since October 2007, that company and another to which Fontenot’s initial contact migrated have provided him with several million dollars at an average interest rate of 3.4 percent.
As a result, Symmetric is producing annual revenue of $2.1 million and has a roster of 100 nurses. Fontenot believes his choice of industry probably played a role in the ease of finding a loan online.
“Because the need is so great for medical staffing companies, I’m assuming people are more willing to take a risk,” he says. “I would assume someone opening a retail store now wouldn’t have much luck” finding a loan.
Investment of $1 million
Still, he and other entrepreneurs who have used the Internet to find investments and loans view it as a godsend, as testimonials on the Web sites show.
The sites generally separate between those where small businesses seek investors, like RaiseCapital, and those where the businesses seek loans, though there is some crossover. GoBigNetwork offers both services, but it focuses mostly on investments.
RaiseCapital, GoBigNetwork and Go4Funding, another major site for finding investors, say about 3,000 to 6,000 small businesses use their site at any given time, and they report about the same number of investors.
Investments range from $10,000 to $10 million, and most are in the $100,000 to $1 million range.
Sites focused on lending include OndeckCapital.com, which lends its own capital to small businesses, and LendingClub.com, which matches lenders and borrowers for personal and small business loans.
Ondeck lent about $20 million last year, and LendingClub matched about the same amount, though only 20 percent of loans on its site are business loans (the rest are personal).
Faster and less expensive
Lawrence Gelburd, a lecturer at University of Pennsylvania’s Wharton business school and an entrepreneur himself, says small businesses would be wise to turn to the Web for investors and lenders. “It’s a much faster and less expensive way to make contacts,” he points out.
“You can get directly to people and don’t have to set up meetings. It’s nonexclusive. You don’t have to sign up with a broker and can be on three different sites in front of 20 different faces.” And of course you eliminate the time and expense of travel.
To be sure, when it comes down to someone actually investing in your company, it’s best to meet the person face-to-face. “But this is great when you can’t do that,” Gelburd says.
Small businesses should realize that they generally won’t garner money on the Internet as easily as Fontenot’s nurse staffing company did. “It’s like a dating game, but with a 100-to-1 ratio,” says Sean O’Brien, marketing director for GoBigNetwork.
Bertsch estimates that less than 5 percent of small businesses coming to RaiseCapital in search of an investor actually snag one. Still, he says that’s much better than the success rate for entrepreneurs who seek venture capital or angel investors in general — well below 1 percent.
Tips for success
Experts recommend several steps for small businesses to improve their chances of success.
1. Produce an appealing self-description. “The most important thing is to present your idea in clear and concise language,” Bertsch says. “I’m surprised how many we see with typos and presentations that are poorly worded or confusing. If your first crack is not your best, you won’t be noticed.”
2. Size of presentation matters. “A lot of times people post too much information: five to 10 pages, which drives away investors’ attention,” says Chandra Pemmasani, chief executive of Go4Funding. At the other extreme, “Sometimes it’s just a few sentences,” he says. “A lot of investors won’t get excited by that.”
3. Consider including video or pictures to give your business a visual appeal. “Those can be very helpful in adding to your presentation,” Bertsch says. “If you’re doing something like a restaurant, a picture tour adds good color.”
Many of the sites offer ancillary services in addition to finding an investor or borrower. For example, Go4Funding has tabs on its home page titled “Need an Expert” and “Business Ideas.”
As for the expert page, if you need a salesperson, a marketer or someone with any other kind of expertise, you can find them there, Pemmasani says. And by posting your business idea, “you can get other people’s comments and even recruit people if they’re interested,” he notes.
Don’t share too much
However, Bertsch recommends caution in sharing your business ideas, even with potential investors. “Depending on the nature of the investor, you have to be careful not to give away the store and have your idea stolen,” he says. If there is cause for concern, just offer enough information to pique investors’ interest.
RaiseCapital has examples of confidentiality agreements you can use with investors and suggests consultation with a lawyer.
Wharton’s Gelburd stresses a buyer-beware approach in seeking money for your business on the Web. “Most people are honest, but it’s very easy to get scammed online,” he notes. “Sometimes people get a little too comfortable online and don’t do their due diligence.”
Employ the same caution you would exercise in any other usage of the internet. You may encounter criminals on line looking to steal anything from your identity, to your money to your intellectual capital. Don’t reveal any sensitive information until you are sure you can trust the potential investor/lender.
Gelburd recommends that you ask any potential investor or lender for three references. “If they won’t give you that, I’d be nervous,” he says.
Still, Gelburd and others say the process of searching for investors and lenders will continue to move online. Young people in particular already spend so much time on the internet that it’s logical for them to use it in their entrepreneurial pursuits as well.
“They’re on places like Facebook so much, that this comes very naturally to them,” Gelburd says. “It’s pretty clear that this will continue. I believe in the value of networking. It’s the life of your business.”
And the place to network if you’re looking for investors and borrowers is the Internet.