Crowdfunding Helps Local Businesses, Families

Solar roadways, cabbage art, an online vegan cake shop and a battery-powered bicycle cart.

Thousands of projects like these seek financial support through the growing trend of online crowdfunding. Entrepreneurs can request a specific amount of money needed for a project, and anyone can chip in through websites like Indiegogo, Kickstarter or RocketHub.

The idea is to pay for a project by soliciting smaller amounts of money from many sources. It helps those with limited access to more traditional sources of financial backing such as banks or venture capitalists. Philanthropists also can extend their reach worldwide.

People contribute to crowdfunding campaigns for many reasons, including to connect to the people seeking donations, to support a business or group and to increase their social network, according to research by Elizabeth Gerber, a professor at Northwestern University in Chicago.

Online crowdfunding stated in 2003 in America. Its popularity has grown with approximately $5.1 billion raised so far this year, which is double the amount raised in all of 2012, according to crowdsourcing.org.

Lauren Leibowitz, a membership administrator at the National Crowdfunding Association, said it has likely grown because of the emotional appeal of helping people accomplish their goals and being a part of the production process.

When someone decides to raise money via crowdfunding, he has to do so with the associated costs in mind. Crowdfunding isn't free, and sites will deduct a percentage of donations for profit. The amount of that fee depends on the site and type of campaign.

There are two strategies people can utilize: flexible funding or all or nothing.

A person using an all or nothing campaign will only receive the pledged money if he reaches a set goal by a specific time. For example, he wants to raise $10,000 in 30 days. Donors will only have to pay if $10,000 is raised.

By using a flexible funding campaign, that same person would be able to keep pledged money even if he didn't hit the goal. Crowdfunding sites offering flexible funding often will charge a much higher fee to campaigns not hitting a goal. Indiegogo charges a 9 percent fee if a goal isn't achieved, but 4 percent when the goal is met.

Some sites are set up as community-based lenders such as Kiva Zip and LendWithCare. Users request an amount and once they garner enough pledges, they receive the money and set up a plan to pay contributors back.

People participating in these person-to-person loan programs do so to help, not to make money. The Kiva Zip site states, "Lending money on Kiva Zip can be risky. You should only loan money on Kiva Zip that you can afford to lose. There is no guarantee that you will get it back."

Others sites, like Piggybackr, cater to specific causes such as schools and youth groups.

Business Boosting

A leading reason many people contribute to crowdfunding campaigns is for the rewards. Most sites are "reward-based" and allow businesses or project leaders to incentivize their contributors by doling out products at various donation levels. The most popular crowdfunding sites, Kickstarter and Indiegogo, fall into this category.

Fayetteville-based clothing company Fayettechill recently held a Kickstarter campaign to launch its new dry bag backpack, the Journeyman. The goal was to raise $30,000 in 35 days. The company raised $34,706.

"Kickstarter is all about new ideas, and this bag is a new idea," said Devin O'Dea, Fayettechill vice president of media and marketing.

He said they chose to use Kickstarter to launch the Journeyman because the product required more intensive designing and planning than their other products.

O'Dea and other Fayettechill executives researched Kickstarter campaigns before launching their own. The perks of crowdfunding looked plentiful, but a lot of planning went into setting up the campaign's page.

"There's a lot of literature out there about how to do a successful Kickstarter campaign," O'Dea said. "I read a bunch of that."

Part of the strategy included increasing the number of contribution tiers before a contributor would receive a Journeyman. They decided to use 16 donation levels and garnered 157 backers. The largest number of backers, 39, pledged $165; three pledged $550 or more.

Fayettechill's "rewards" ranged from stickers for a $5 pledge to a package that included many company products such as a Journeyman, a cooler, shirt, hat and shorts for pledges of $500 or more.

"These extra tiers kind of allow people to explore the brand as well as the bag," O'Dea said.

Fayettechill had to design their campaign page layout and produce a video advertisement for their product. The cost of various rewards had to be figured into the fundraising goal.

The campaign has exposed the company to several niche publications like Blue Ridge Outdoors, 50 Campfires, Gear Junkie, Gearographer -- just to name a few, he said.

Humanity Helping

The Smith family of Centerton is using GoFundMe to raise money for their 21-month-old son's medical bills.

Coltrane Smith was diagnosed in May with stage 4 neuroblastoma, a cancer most often found in children 5 years and younger. Treatment will be costly and include several chemotherapy cycles, possible surgery to remove at least two tumors, stem cell harvesting and transplant, and radiation.

Amber Sisemore, a friend of Coltrane's mother, Sonja, is running the Smith's campaign page. The two taught second grade at Glenn Duffy Elementary School in Gravette for seven years before Smith resigned to care for her son.

"We sat down and we talked and I said, 'Give me a number, tell me what you think you'll need to make it,'" Sisemore said.

They set their fundraising goal for $70,000. The family gets to keep what they raise even if they don't meet their goal. So far 187 people have donated $15,380.

"I didn't really know what I was getting into," Sisemore said. "I just knew I wanted to help."

She researched crowdfunding sites before choosing GoFundMe, and said she's pleased with the results so far.

Sisemore said that it's easy to share updates via the site and to link them to other social networking sites. When someone donates, she receives an email, to which she can immediately respond with a "thank you."

Also appealing is the "offline donation" feature, where outside fundraising can be added into the amount raised through the website, which helps them avoid the higher fee for not hitting a goal. Outside collections are not subject to the fees charged for online donations. She said they had a poker run in July, which they factored into their donation totals on the website, and they will have a spaghetti dinner fundraiser in September and are selling T-shirts.

The Future

Crowdfunding experts agree the next step for the industry is equity crowdfunding.

This would allow people to invest in companies and get a piece of the company rather than a reward. Industry leaders are waiting for the U.S. Securities and Exchange Commission to release final rules regarding equity fundraising.

Leibowitz said that once the commission releases those regulations, every business hoping to use equity crowdfunding will have to meet transparency requirements and investors will have limitations for how much they are able to invest.

It will operate similar to the stock market, but on a much smaller scale: functioning privately and handling smaller sums of capital.

Leibowitz said the association's biggest concern is spreading awareness of the differences in reward-based and equity crowdfunding. Equity crowdfunding can be riskier, because the success of a campaign hinges on the dependability of the individual or business managing it, and the willingness of investors.

The relationship between the contributor and the campaign manager in traditional crowdfunding ends once a campaign ends and the contributor receives the product or the reward, Leibowitz said. In equity crowdfunding, the continued success of the manager is also important.

Current equity crowdfunding sites function as advertising hubs for investors to shop for businesses looking for startup money, and not as platforms where people may directly invest in companies. One such site, EquityNet, is headquartered in Fayetteville. It was founded in 2005, and company executives claim it is the first in the nation.

Adam Vanderbush, EquityNet chief financial officer, said the company is taking steps to prepare for the new regulations. He said they are preparing to support the boom of unaccredited investors.

He said it's difficult for small businesses to raise money because of a lack of investors in some parts of the country. Equity crowdfunding will vastly expand investment opportunities and will enable businesses to generate startup money.

"This is going to be a really, really big deal for the economic impact of entrepreneurship in America in particular," Vanderbush said.

NW News on 09/02/2014

Upcoming Events