Article Crowdfunding

bgs international exchange spring 2013 www.betagammasigma.org 19

From Wall Street to Main StreetThe Potential Power of Crowdfunding for Small Businesses

By: Seth Treptow, BGS Communications Director

You’ve no doubt heard the old adage, “It takes money to make money.”

It’s hard to argue with that logic. Ideas, no matter how good they might be, need funds behind them to find any kind of impact or gain any kind of traction in a competitive business world.

So let’s say for a moment that you have a great idea for a business venture. You’ve thought your idea through, and you are certain it’s a winner. You just need some funds, let’s say $50,000 or so, to get yourself off the ground. How do you go about finding the money to make your dream a reality?

If you have access to an angel investor or venture capitalist, you might be set already. Congratulations. Feel free to quit reading anytime. But assuming you are like most people, and wouldn’t know a venture capitalist from a hot dog vendor, your options are somewhat limited.

You could ask your friends and family for money, or possibly take out a loan. And failing those options, there’s always the horse track or the lottery. Anyone know what Powerball is up to this week?

Or, you could take your great business idea in a completely different direction.

Meet the crowd. Welcome to crowdfunding.In a nutshell, crowdfunding is a mechanism

that allows a project to receive funding directly from supporters via the Internet.

“It’s a way to let multiple people invest in a company that is either backing it in exchange for a reward, or if you are an accredited investor, backing it in exchange for equity,” explained Eric Corl, president and co-founder of the crowdfunding platform Fundable.com.

Crowdfunding platforms like Fundable provide the means for individuals to explain their project through a few paragraphs of text, and maybe a video clip or two, to potential supporters. Supporters can then choose to contribute funds to the project at a variety of levels.

Boiled down even further: If people like you and your idea, they will give you money.

“The real core of crowdfunding, the key driving force, is based on affinity for a person or a cause or a desire for a product,” Corl said. “Friends and family will back founders just because they like them. Consumers might have a desire or affinity for the product and might want to really see it come to market.”

The crowdfunding concept is not new in and of itself. The idea, in principle, has floated around the Internet for

more than a decade. Early platforms that adapted the concept into action focused their efforts on funding

artistic ventures and projects, such as movies, books and musical recordings. In recent years

though, several platforms began tailoring the crowdfunding concept to suit the needs of small businesses and entrepreneurs.

“I was watching a news show and they did a story about a football club in England. This gentleman was tired of billionaires owning all the sports teams,” recalled Sally Outlaw, co-founder and

CEO of Peerbackers.com. “He started recruiting players and started the first web-

owned football club in England. Members of the community were going to give about 70

pounds a year and they would be owners in the club. He raised $400,000 in a matter of days.

“I thought to myself, ‘Why aren’t they doing this for small business?’ A lot of us have friends and family and customers and neighbors who would

support us in small increments but they may not have access to funds like the angels and venture capitalists. The light bulb went off that night. At the time, there was no crowdfunding industry. I didn’t even know crowdfunding was a term.”

Outlaw sees crowdfunding as a very interesting way for companies to utilize technology, along with existing social

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media to generate the funds needed to get up and running.“As a whole, it costs a lot less these days to launch a

company in its early stages,” she said. “We focus on that early stage capital, what we call napkin money. There was a time that you could write an idea down on a napkin and pitch it to an investor and they would go for it. That’s the part that is missing in the business world right now. It’s difficult to come up with those funds.

“We give people the opportunity to come in and put their napkin out there. We provide an opportunity for their own friends and family – their crowd – to support their project. Plus, there is a cross-pollination that can occur. If you come to Peerbackers and you have a cool project, it’ll be seen by other people. Someone may come to support one project, see yours, and then decide to support you too.”

Money for SomethingLet’s face it. This is the business world, not a Dire

Straits song. Few, if any, people will give you “Money for Nothing.”

Crowdfunding supporters are much the same. They expect something in return for their financial support of the project.

“When you have a startup you are very excited about it,” explained Dan Blacharski, founder of Ugly Dog Media, a media and marketing company that offers crowdfunding consulting services. “A lot of innovators will make the

mistake in assuming that everyone else is equally excited and that they’ll want to jump on board just because they’re excited by it. That isn’t the case. You have to give them a reason to want to buy in.“

Owning a stake in your company would be quite the carrot, but under existing rules and regulations, that’s a major no-no. While those rules have begun to change (more on that later), most crowdfunding campaigns are left with only one option: giving tangible incentives or “perks.”

Perks can come in a variety of sizes and shapes and are typically proportional with the amount of money an individual contributes to the campaign. In other words, the more you give, the more you get.

A crowdfunding campaign might, for example, give you a t-shirt for $25, a sweatshirt for $50, and so on down the line until the project is fully funded or your closet is full. Whichever comes first.

The key though, as Blacharski explained, is to make sure your perks are something that a potential crowdfunder will see value in.

“You have to give them something, beyond just your excitement, to get them excited about it too,” he said. “A lot of the campaigns you look at, you’ll see incentives like ‘our undying gratitude,’ or ‘We’ll put your name on our website.’ Maybe they’ll send you a sticker. Give us $50 and we’ll send you a coffee mug. No one really cares about those things.”

One perk option that works quite well for many business ventures is to pre-sell the products and services that the company is planning to bring to market. Corl sees many companies going this route with their campaigns on

wall street to main street (continued from page 19)


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Fundable.com. He sees several advantages to this avenue of incentives.

“The beauty is that before you go and spend $50,000 of your life’s savings for the first run of a product, you can go out to the market and see if there is actually demand and interest,” said Corl. “Even a failure can save you potentially years of your life. It’s a great market validation tool and great way to build social proof and marketing behind your product. You can generate demand and publicity for your product and service for your startup and raise that initial capital to launch or grow your company.”

Once a company sets up their project’s profile and establishes its campaign target and incentives, they can open the door to the crowd. Friends and family, along with anyone on the World Wide Web, can at this point start funneling funds your way. But they better act fast, as this is a limited-time offer.

Campaigns typically are conducted within a timeline specified by the project’s creator and are not allowed to continue ad infinitum. As Outlaw explained, the time limits are put in place to benefit both the entrepreneur and his or her supporters.

“As the project owner, you don’t want to devote six months to something. You are going to burn out. You also want people to know that there is a sense of urgency,” she said. “My business partner comes from a sales background, and he knows that you have to give a deadline or people won’t be motivated to stop what they are doing to support you. From a backer’s perspective, it’s the same thing. You don’t want to see someone on Facebook for six months begging people to donate to their project.

“There is a sort of burnout that comes with the process. You want to keep things fresh and exciting. We recommend 45 days as the optimum time period.”

But what happens if a startup fails to raise its targeted funds before the deadline is met? Do they have to give the money back? Do they get to keep it? Do I still get my t-shirt?


“The beauty is that before you go and spend $50,000 of your life’s savings for the first run of a product, you can go out to the market and see if there is actually demand and interest. Even a

failure can save you potentially years of your life.”Eric Corl, President and Co-founder, Fundable.com


The answer…it depends.The final destination for the funds will largely depend

upon which crowdfunding platform the campaign was conducted. Some sites only give a project the raised funds if it meets or exceeds the campaign’s stated capital goals. If it fails, the money is returned to the supporters.

“The theory behind fixed funding is that if you don’t reach your goal you can’t necessarily pull off what you said you were going to do,” Outlaw said. “If you need an oven for your bakery, and it’s $10,000 and you only raise $5,000, some sites aren’t going to give you that money. You can’t buy half an oven.“

Other sites though, like Peerbackers, have adopted a more flexible approach to goal targets.

“Our policy is that if you can supply the rewards that you offered in exchange for that funding, we will release the money to you,” explained Outlaw. “You don’t have to reach your full goal. With those funds, you can get your first inventory or website up. You can get your business going and test your market. Then, once you have traction, you have the means to get the larger amounts of money that you might need to grow even more.”

While the sites vary on their willingness to forward

funds to campaigns that miss their targets, platforms are universally open to campaigns exceeding their goals.

A More Equitable Playing FieldLet’s say your business idea doesn’t lend itself to the

incentive-based model of crowdfunding. Maybe you won’t be producing a tangible product that would serve as an enticing perk. Maybe you need to raise much more capital than can be feasibly accomplished by exchanging rewards for contributions. What then?

You could offer shares in your company, but that’s easier said than done, particularly from a legal standpoint.

“If you write your Uncle Jim an I.O.U. for 20 percent of the business, you are most likely committing securities fraud,” explained Alon Hillel-Tuch, co-founder and CFO of the crowdfunding platform Rockethub.com. “There are a lot of things being done in the small business space that isn’t kosher or not actually permitted. There are very stringent regulations out there about how businesses are allowed to raise capital. There are a lot of issues that are arising out of that.”

Under the Securities Act of 1933, companies in the U.S. may only sell shares to individuals classified as accredited investors – those with a net worth in excess of $1 million or with an annual income greater than $200,000.

That is about to change.In April 2012, a piece of legislation called the Jumpstart

Our Business Startups (JOBS) Act was signed into law. The act, designed to encourage the growth of small businesses, loosens many of the previous regulations that limited the means by which startups could raise capital. Most notable to the crowdfunding discussion, the JOBS Act allows non-accredited investors to get in on the ground floor of

a startup. As a result, the door has been opened for another model of crowdfunding – one that offers

company equity in exchange for investments – that many in the field are very excited about.

“It’s the accredited investor space that has really taken control of that market,” explained Hillel-Tuch, who testified before the U.S. Congress as part of the discussions prior to

the JOBS Act’s passage. “They have been critiquing, judging,

curating and filtering the investment opportunities, often at the disregard for unaccredited investors who should have the opportunity and right to

participate. We see the JOBS Act as democratizing the access to capital.”

Blacharski also sees the potential impact that the JOBS Act may have on equity

crowdfunding. “The idea of equity-based

fundraising brings Wall Street to Main Street,” said Blacharski. “It gives some of that equity based funding, that was previously out of the hands of small business, to small companies looking for funds to start up and raise money.”

wall street to main street (continued from page 21)


He said this development could usher in a whole new wave of innovation.

Under the JOBS Act:• Crowdfunding campaigns will have a cap of $1

million.• Startups will not be allowed to sell equity

through their own websites. As such, any equity crowdfunds will have to be conducted via a registered portal.

• Individuals who make $40,000 or less per year will only be allowed to invest up to $2,000 annually.

• People making $40,000 to $100,000 will have their investments capped at 5 percent of their annual income.

• Those making more than $100,000 annually will be allowed to invest up to 10 percent of their income each year.

Another aspect of the JOBS Act that will open things up for startups is a removal of the ban on general solicitation. Fundable.com’s Eric Corl see’s this as a huge advantage for startups.

“Currently, if you are an entrepreneur and you need funding, you cannot go out and post that on Facebook or Twitter offering interest in your company in exchange for equity,” he explained. “That ban will be gone. With that, entrepreneurs will be able to publicly discuss how they are raising money for their business with equity.”

But those are just the broad strokes. At the time of the JOBS Act’s passage, the Securities and Exchange Commission was given 270 days to iron out the finer details for the legislation. At the time of this article’s writing – 355 days since the legislation’s passage – those rules had not yet been put into place. As such, crowdfunding platforms, startups and investors are stuck in a holding pattern.

“They are big changes,” said Corl. “The laws being implemented are going to have a huge impact on the economy, so it’s probably prudent for the SEC to take its time,” he said. “It may be six months, a year or longer. But once they go through, it will have a profound impact on how startups get started and raise their money.”

One portal that has set its focus on the equity side of crowdfunding is Wefunder.com. The site focuses strictly on the equity side of crowdfunding, and is currently offering a limited amount of private investment opportunities to accredited investors.

While both equity and perk-based crowdfunding stem from the same idea, Wefunder founder and president Michael Norman see them as being totally different.

“On a perks-based site, you are pre-buying a product or you are donating to a project,” he said. “The relationship you have to that thing is very different from being able to say, ‘I’m an equity investor. I have a stock certificate with my name on it.’ That’s really exciting. There’s an entrepreneur out there that is working on something, and now I can go along for the ride as an investor.”

Beyond their financial investment, Norman also believes investors will provide startups with support in other valuable ways.

“At the end of the day, you will have hundreds of people who are really invested in the success of the company – all


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of whom have different connections and networks and different ways of helping,” he said. “When you think about the network of individuals that can connect you to a potential customer, or can put the word out to find you a potential employee, you have expanded by orders of magnitude by having all these investors. If companies treat their investors well, these individuals will go above and beyond to evangelize and advocate for your company and its products.”

Of course, not everything about the equity model of crowdfunding is peaches and roses.

Under the JOBS Act, companies will be required to file tax and financial information with the SEC, and companies with more than $500,000 in investments will also be subjected to an annual audit. In addition, companies will be required to provide regular updates to investors.

Then there is the matter of investor education. For many non-accredited investors, this is entirely new territory.

“People are going to have to learn how to do this,” explained Norman. “We’re not shying away from the fact that investing in a startup is a high-risk investment. You can’t think of investing in a startup like investing in the stock market. You should go into it, to a certain extent, expecting to lose your money. You might not. You might, in fact, make

a lot of money.” Beyond the risk, Norman points out that even in the case

of successful startups, investors should not expect to get rich quick.

“You shouldn’t expect to see any cash for five to seven years. These are highly liquid investments.”

So given the high risk and slow turnaround, the question must be asked. Why in the world would an investor give me money for my business?

Norman chalks it up to excitement.“People should be investing in startups because they

are excited about what the company is doing,” he said. “They should see the entrepreneur and be like, ‘Wow. I get what they are doing. I understand how this could be a big business, and I want to be part of this experience.’”

Along those same lines, Hillel-Tuch sees a personal connection with a company’s product as being a big motivator for investors.

“If your local coffee shop is raising funds to open a second location across town, it might get people interested in investing because they really like Joe’s coffee,” said Hillel-Tuch. “They are less concerned about the evaluation of the company, the stake they are getting or the return on investment. They consider it, but it is a less important factor. Their main driver is helping Joe expand.

“The motivations are very different than the typical investor. The typical investor might look for very different deal terms to maximize their return. Because their experience with your business is different than the typical investor, we will likely see some interesting and different deal terms out there that the traditional investor probably would not accept.”

Tapping into the CrowdNo matter how good your business idea may be or how

compelling your story is, no crowdfunding campaign – equity- or perk-based – will ever succeed if it is missing one critical component: the crowd.

“Kickstarter is not the crowd. Kickstarter is just the platform,” explained Blacharski. “You have to bring your own crowd. The first thing you need to do is find out who that crowd is and where they are. It’s not always obvious. A crowd is not just a crowd. It’s specific. It’s not just a bunch of random people.”

Blacharski is not alone in his assessment.

wall street to main street (continued from page 23) “On a perks-based site, you are pre-buying a product or you are donating to a project.

The relationship you have to that thing is very different from being able to say, ‘I’m

an equity investor. I have a stock certificate with my name on it.’ That’s really exciting.”

Michael Norman, Founder and President, WeFunder.com

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“We’ve seen it on our platform and others. Projects that can tap into an already prepared crowd, or base of customers, are much more likely to get funding support,” explained Outlaw. “That doesn’t mean you can’t be successful if you don’t have a crowd, but you have to start three to four months in advance to build a Twitter and Facebook following. You have to build relationships and let people know that you are going to launch this project.”

According to Outlaw, crowdfunding is not a “post-it and forget it proposition.”

“You can’t just put it on there and expect people to flock to it,” she said. “That rarely happens unless you are lucky to get picked up by CNN. You really need to constantly promote and realize that it is a full-time job. People will give five to seven hours a day to their campaign to be successful.”

Another factor that can impact a campaign’s success is, interestingly, its success. As Hillel-Tuch explained, it’s human nature to support projects that already have support.

“It goes back to the high school dance. No one wants to be the first person on the dance floor,” he said. “You have to find people who believe in you and are willing to join in. It’s only once you have people involved from your own network that your project will gain traction and others will join in.

“Some people will launch a project and expect magical money to appear from nowhere. While we do have a lot of users who visit our site looking to fund projects that they may not know personally, they do want to see projects with activity on them.”

Individual investors aren’t the only ones who are more likely to support projects that have demonstrated success and traction.

“We find that a lot of venture capitalists and angels have been looking at our platform and projects and have been making their own investments based upon how they see projects perform,” said Hillel-Tuch. “We have seen several groups that, after finishing their campaign on Rockethub, have been approached by venture groups seeking to give them additional capital.”

Corl also sees crowdfunding as a great tool for companies with eyes on one day seeking venture investment. In his opinion, crowdfunding makes the landscape much more efficient.

“All the players are still going to be in the game. It’s just going to be a faster game,” he explained. “You’re not going to have the same types of seed-stage investments being made by professional capitalists. They can now put their money in companies that have already showcased traction – that have gotten out there and demonstrated social proof and market demand.

“As an investor, I can look at a company and see that they have already generated $50,000 for their startup. My investment is more likely to have some kind of payoff or effect with this company growing than someone investing in just a napkin idea that hasn’t been tested in the market.”

In the end though, it all comes back to the idea. The crowd is nothing without a strong, relatable and digestible idea to support. Combine that with some hard work and the right amount of social leverage, and small businesses and entrepreneurs have a very valuable new tool at their disposal.

Need money to make money? Maybe it’s time to join the crowd.

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