• More businesses turn to crowd-funding to raise cash
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     | March 18,2013
     
    Jeb Wallace-Brodeur / Staff Photo

    Musician Dave Keller plays the guitar in his Montpelier home on Friday. Keller recently used the crowd- funding site Kickstarter to help finance a recording project with other top-level talent.

    Montpelier musician Dave Keller needed $12,500 to produce an album of blues guitar music in Memphis. Dori Ross in Waitsfield wanted to move her maple products-based operation out of her garage to a commercial kitchen but needed $14,000 to make the move. Walter Jeffries in Orange needed to expand his pig farming business by adding an on-site slaughterhouse. The cost was at least $25,000.

    Each of these entrepreneurs looked beyond traditional ways of raising cash — bank loans, a Small Business Administration loan or an angel investor — to a growing but relatively new source of finance known as crowd-funding. By harnessing the expanse of social media to reach out beyond their local communities and local banks, each has been able to reach financial goals — and beyond.

    Vermonters who have used crowd-funding to raise cash say this technique can be rewarding financially but is often hard work requiring many hours of preparation and outreach, as well as personal creativity in building their online campaign.

    Keller, Ross and Jeffries, as well as other Vermonters, have relied on Kickstarter, a crowd-funding website that has become very popular. It caters to artists, nonprofits, and small business owners. While it is perhaps the best known of the new crowd-funding websites, others such as gofundme.com, indiegogo, crowdrise.com, equitynet.com, ipo village, ifundy.com, and rupee.us do essentially the same thing. They help people raise money. They also charge a fee for their service. In the Kickstarter model, it is 10 percent of the funds raised.

    Crowd-funding has grown with the rise of social media such as Facebook, Linked-in and other sites where millions of people can gather to exchange ideas, photos, music etc. People are asked to donate a defined amount of money for a specific cause or project in exchange for various rewards.

    Crowd-funding falls under three areas: equity, donation and debt. The equity-based model asks a crowd to donate to a business or project in exchange for equity. Donation-based crowd-funding asks to donate in exchange for tangible, non-monetary, rewards such as an e-card, T-shirt, pre-released CD, or the finished product. The debt-based model asks for donations in exchange for financial return and/or interest at a future date. The businesses interviewed for this article each used the donation-based approach on their Kickstarter campaign.

    While crowd-funding can help a small business expand, it has some limitations. By advertising for funding ideas, you are exposed to potential copycats. The site may limit the amount of funds one can receive, and there are issues with regulations and taxation that are still being worked out.

    Keller raised $15,000 for his recording. Kickstarter helped him bypass record companies to whom he would “then be beholden, which means having to do it their way.” By raising funds this way, Keller says the process of recording becomes “revolutionary. It eliminates the record company, the middleman.” He offered reward packages at different levels of donation to his fund raising campaign. About 75 percent of donations came from Vermonters but he had to do a lot of social media work on Facebook and through his email lists to get people to donate.

    “I looked at all sources of funding including angel investors and banks but I was too nervous to put my house up as collateral,” said Ross about her crowd-funding experience. “I was looking for funding to support the business, for inventory and equipment to purchase, and hoped to move into a commercial facility.” She declined an angel investor offer because she “didn’t want to give up equity this early in the development.”

    Ross raised $15,000. This approach is “a great way to raise funds and not give up equity.” She, too, offered a variety of promotional packages to those who donated to her campaign.

    According to Ross, contributors included people who knew her and family members, but also people who support many campaigns — people she called Kickstarter groupies. “They want a closer connection to the product or company,” she explained. Donations came from as far away as Australia. Two backers pledged $400.

    Jeffries, who owns Sugar Mountain Farm, said he began the search for funding for his slaughterhouse in 2008. The bad economy did not help him as he looked for funding. “I have had many bank loans and paid them all back in a timely manner over the past three decades. But this time I got an almost uniform answer, ‘We are not lending to new or expanding businesses at this time,’” he explained.

    Jeffries said the campaign was “a lot of work.” He suggests that anyone doing a Kickstarter project “do their own marketing and get the word out as they do not provide much in the way of support or marketing. It is really just a platform.”

    In Jeffries’ estimation, “a bank loan is simpler and easier, provided the banks are lending.” However, he added, “the Kickstarter model does work and if needed I might do it again.”

    The Big Picture Theater in Waitsfield needed $120,000 to change from film to digital projection and raised $25,000 on Kickstarter. Co-owner Claudia Becker said the process was “extremely easy, user friendly and a great way to communicate to donors.” Also, “people are familiar with the format, know it has supported many great projects, and has a high success rate.” Crowd-funding is a modern form of “barn raising” where “the community came together to build something for the future.”

    By raising more than $25,000 in a campaign that needs $120,000 for all improvements she is able to save nearly a quarter of the total amount in loan payments.

    Rob Williams raised over $8,100 to create “YakItToMe!” a Vermont Yak Mobile BBQ Food cart. “Crowd-funding, it’s a powerful way to use the new web to support creative and entrepreneurial projects,” he said.

    Williams believes crowd-funding has become “a new way to raise money in the new media age.” If there are any problems with this model, he says its transparency. “You have to trust the money you give will be spent appropriately.”

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