So, what is crowdfunding?
Crowdfunding can be broken down into four categories:
- “Passing the Hat” – the kind of fundraising we are all accustomed to at church or in civic groups or for non-profits. Asking for donations for a cause based solely on the extent of the need or the mission itself.
- Rewards-based – this is the kind of fundraising, whether on or offline, that depends on exchanging a product or experience of some kind with a certain donation or contribution amount. This is the kind of crowdfunding most are familiar with through the Kickstarter or Indigogo platforms. Kickstarter alone has helped product creators raise over $5 billion in just a few short years.
- Shared Debt – While banks and accredited investors could always officially provide loan terms to small businesses, and certainly many startups have relied on unofficial family and friends loans. However, due to the Invest Georgia Exemption, (IGE) it is now possible for anyone who lives in Georgia to join with others to extend debt to a Georgia business with repayment plans unique to each deal.
- Shared Equity – In the same way, everyday Georgians with a desire to invest in local businesses in exchange for small, shared ownership with others microinvestors is now possible thanks to IGE.
SparkMarket online platform was used to close the first investment crowdfunding campaign in the country, Bohemian Guitars, who is proving to be the perfect case study of iterative crowdfunding. They first raised over $50K through a Kickstarter campaign to launch their oil-can guitar manufacturing company, then raised $130K in a few weeks through SparkMarket to fulfill a large purchase order. Most recently, they were the first non-tech company accepted into 500 Startups, an accelerator in Mountain View, California. And their continued success will benefit the Georgia residents willing to share in their early risks.
So why would a crowd invest?
The value of investment crowdfunding was encapsulated by a story by Megan that we can all relate to in Rome, Georgia. She had a business go under right outside her neighborhood and the property sit empty for years. After a new owner promised a brew pub, neighbors rallied on a Facebook page wanting to follow the news and support the renaissance of this building they had all stared at as it became more dilapidated. That Facebook page grew to 1,000 fans talking with each other before the plans based on traditional financing fell through. They realized that as a crowd they could raise the money themselves and form a group to manage it.
That project is still in the works, but the story resonates with many of us who have watched the recession come and go in Rome, Georgia. We feel connected to local buildings, local businesses who have weathered the storm, startups that have attempted to do brave things, and projects that directly impact our lives. Investment crowdfunding gives us – us non-accredited, everyday Georgia residents – the ability to do something about those things we care about. And it gives our businesses options that depend on the value of its products and services to its own customers.
But, that doesn’t mean that crowdfunding is the easy way.
“Crowdfunding is as hard as any attempt to raise money,” said Jeff, “it’s just a different kind of effort from traditional financing.”
The most important ingredient in a successful crowdfunding campaign? “A great story told through a great video” ranked number one. But also required are smart pledge levels and rewards or deal terms. Rewards and investment deals should benefit both the backer and the company equally. and a strong community.
“I advise anyone wanting to execute a crowdfunding campaign of any type to build your community, your fan base, first,” cautioned Megan, “through whatever method you can – samples, events, promotions, tastings, trials, discussion groups, meetups, etc.”
“If you can’t get people to like your company on Facebook or follow it on Twitter, you probably won’t get them to give you money either,” said Jeff wisely.
So, how safe is all of this for the investor?
Simple answer: you can lose your money. Just like any investment, the company can tank. Under the IGE law, everyday Georgia residents can invest up to $10,000 into one company through crowdfunding, either as a lender or shareholder. Like any loan versus investment, the group of lenders will be in line in case of bankruptcy to be repaid. However, if a company or product really takes off, a shareholder will be more rewarded.
SparkMarket is advocating for the rights of everyday citizens to take their own risks, the way that 3% of the population has been able to since the late 1930s – to consider all options, details, and merits of a deal before deciding to participate and then being on that journey with the company. It could be argued that when I invest in a company down the street, I have a lot more influence and accountability then I do when I put more in my 401k that invests in companies so big I wouldn’t even be able to walk in the front door. In the end, the rampant growth of crowdfunding is an indication of a change of ethos, a change in the belief that big companies are safer bets, and maybe a return to an old-fashioned sentiment that when I invest locally, I do more benefit to myself.
So, what’s the holdup?
It was clear to me that for crowdfunding of any type to be utilized in a more meaningful way in Rome, Georgia, two big problems would have to be overcome.
- Investor or backer hesitance. There is a role to be played by curating deals and campaigns to help local investors and backers feel more comfortable participating in this new method. Additional education opportunities will also help.
- Campaigning Know How. There is a real need to figure out how to assist with the costs and skills needed to organize, plan, and execute a campaign involving a different kind of marketing, calculation, and operation than traditional business.
These are both problems that we take seriously and consider it in our community job description to tackle. Along with our tenants, advisors, and partners, we will take these challenges on over the next year with a goal of seeing three meaningful crowdfunding successes for three local companies.
The program was sponsored by the visionary Heritage First Bank.