Blog‎ > ‎

Crowdfunding a growing practice for small businesses, but it's not a guaranteed payday

posted Sep 19, 2014, 12:49 AM by J Shaw   [ updated Sep 19, 2014, 12:49 AM ]
Crowdfunding is becoming a popular way for small businesses to raise capital, but it's far from a guaranteed payday.

A pair of downtown Jackson businesses found that out after recently experimenting with crowdfunding – the practice of collecting money from a large group of donors via the Internet to fund a specific cause or project.  

Goals were not met, but the experience was something to learn from, owners say.

-0005214df69017d4.jpg                                                 Grand River Brewery owner John                                                        Burtka recently conducted a                                                                  crowdfunding campaign on                                                                    CrowdBrewed in an attempt to raise                                                      money to buy distilling equipment.MLive file photo 

John Burtka, owner of the Grand River Brewery, 117 W. Louis Glick Highway, hoped to raise $50,000 to purchase new distilling equipment to expand the business. He opted for CrowdBrewed, a site dedicated to craft brewing projects, in hopes beer lovers in Michigan and beyond would get behind the project.

That didn't turn out to be the case. The project received just three pledges for $535. Crowdfunding websites keep a portion of the funds generated, usually 3 to 7 percent, plus an additional amount to pay for credit card fees.

"Why pay 8½ percent (of the pledges) to somebody when you can do it yourself?" Burtka said. "Your support is local from people that know you, your business and your location.

"The national campaigns are more for people coming out with new products."

Grand River's mug club campaign in 2013, which was done in-house and on its website by using a PayPal account, was far more successful, raising nearly $20,000. Burtka said he received a lot of feedback from supporters who said they felt more comfortable dealing directly with the business, as opposed to going through a separate website.

"I heard, 'Why do I have to give all my information to this other website?'" Burtka said. "'Why can't I just give it to you?'"

Evan and Koren Farmer, owners of Cuppa coffee shop, 156 W. Michigan Ave., used the popular site Kickstarter in an attempt to raise $15,000 to purchase a truck to give their business mobile capability. They received 94 pledges totaling more than $5,000. However, because the campaign fell short of its designated goal, no funds were collected.

Had the campaign been successful, Kickstarter would have kept 5 percent of the donations plus another 2.9 percent to pay for credit card fees – rates vary by site, but Kickstarter is within the industry average.

Evan Farmer opted for Kickstarter in part because of the site's name recognition and high-volume traffic.

"We hoped people would find out about the project just by chance because a lot of people are on Kickstarter," Farmer said. "I'd say at least 75 percent (of backers) were people we knew.

"I would say the advantage of Kickstarter in that way isn't very big, unless you're developing a new project or have some new piece of technology."

As an incentive for donors, both Farmer and Burtka conducted reward-based campaigns, where backers receive merchandise and other perks in return for a donation. For example, a pledge of at least $50 might come with a T-shirt.

A better way to raise capital

Businesses can crowdfund to pay for startup costs, buy new equipment, add on to a current location or move to a new one, all without taking out a loan from the local bank or credit union.

"I happen to believe that crowdfunding will empower small businesses and change our economy," said Michael S. Melfi, a Birmingham-based attorney who specializes in intellectual property, general counsel for the new Michigan-based crowdfunding website, FunderBuilt, and author of "The Simple Secrets of Crowdfunding."

While more and more businesses are using crowdfunding, being successful at it is another story.

Many crowdfunding websites require a target amount for each campaign. Some, like Kickstarter, are all-or-nothing setups, where the campaign is only funded if it reaches or exceeds the designated target.

Only about 55 percent of crowdfunding campaigns reach their target goal, Melfi said, but added that number could be a lot higher with better planning and execution. FunderBuilt goes above what Melfi considers the industry standard in helping clients be successful.

"It all starts with having a great plan in place," Melfi said. "You have to have a good video to explain what it is you're trying to do.

"Are you asking for the right amount of money? Are you in position to communicate with your audience for 60 days for 15 minutes to one hour per day?"

A fast-rising option for businesses is to do equity-based campaigns, which allows backers to actually invest in a company with the idea of getting a return. Equity-based campaigns typically mean higher goals, higher pledges and higher fees.

Daniel Ross, owner of the Old Irish Mill, a planned Irish-themed food and recreation destination in Brooklyn, is looking to experiment with an equity-based campaign through LocalStake in hopes of raising $1 million in capital.

The new Tecumseh Brewing Co. recently completed a successful LocalStake campaign for $175,000.

"It's really geared toward non-accredited investors, which is about 97 percent of people," Ross said of equity-based crowdfunding.

The crowdfunding site that gets the highest volume of traffic, GoFundMe, isn't necessarily geared toward businesses at all. It's billed as a "personal" fundraising site, which people use to raise money for medical bills, funeral expenses, college tuition, charitable causes and just about everything else.

GoFundMe isn't rewards-based or equity-based. It's simply donations.

LaZeez Flavors of India, 3634 McCain Road, is using GoFundMe to raise funds to move to a downtown Jackson location. The target amount is $20,000, but the campaign has only raised a small fraction of that amount thus far.

Farmer is looking into starting another campaign through the Michigan-basedPatronicity site.

"They actually work with the (Michigan Economic Development Corp.)," Farmer said. "So, certain projects are eligible for matching grants, which is very nice."

Beyond just business

Businesses are far from the only ones using crowdfunding.

Jackson-area filmmakers Gus Pewe and Tommy Kraft have run successful Kickstarter campaigns in recent years. Kraft raised more than $20,000 to help fund his "Star Trek" fan film "Horizon," while Pewe generated nearly $2,200 for his award-winning short film, "Same Ghost Every Night."

Pewe said most of his backers were acquaintances, although he did get some pledges from people who wanted to support a small filmmaker or were fans of the genre.

"There was a guy who gave us $100 from Leeds, England," Pewe said. "We looked at the other projects he backed, and they were all kind of a similar genre."

Pewe is running a Kickstarter campaign for $5,000 for his latest project, "Fight City: Shaolin Throwdown," a martial arts comedy. He learned from his first campaign, when he didn't ask for enough.

"We went over budget last time, and then the rewards still had to be shipped and mailed out," Pewe said. "This time, I've tried to scale back on the things I'm offering that need to be shipped."

Because there are so many crowdfunding sites, Pewe said there seems to be a lot of confusion on how things work.

"When you do an all-or-nothing campaign, there is that sense of urgency," he said. "People want to see you succeed, so they might tend to give a little more. There are other sites out there, like Indiegogo, which allow you to keep part of the money. So, people tend to get confused."

Businesses and others looking to raise money through crowdfunding are still fine-tuning the best practices to be successful.

Experts, like Melfi, are teaching crowdfunders to think beyond the Internet.

"With FunderBuilt, we offer the option of having business cards, posters and flyers made to support a campaign," said Melfi, who added having parties or open houses to kick-off campaigns is another great way to help spread the word.

"It's all about reaching and communicating with your audience."

Posted from : http://www.mlive.com/business/jackson-lansing/index.ssf/2014/09/crowdfunding_a_growing_practic.html