Finding Funding in a Crowd

Crowd-sourced funding, as it stands now, is kind of like the reality show Shark Tank, without the sharp teeth--and without the really big bucks.

Small businesses and entrepreneurs use written pitches and videos to appeal to members within a site’s online network and set a target amount they’d like to raise. By sheer virtue of the number of donors, who invest a few hundred dollars or $1,000 or so each, startups are often able to meet their targets and get off the ground.

But the impact of these crowd-funding sites could grow.

The SEC, according to news reports last week, is considering letting investors purchase equity stakes in companies through these sites—something that has been banned in the past. It's part of the SEC's effort to make it easier for small companies to use crowd-funding and social networking sites to raise money without undergoing full disclosure and other legal requirements of securities laws for share issues. A petition calling for the securities rules to be eased for crowd-funding share issues of up to $100,000 has been backed by almost 150 organizations and individuals, SEC chair Mary Schapiro told lawmakers last month.

That could benefit startup crowd-sourced funding websites such as Peerbackers LLC, or ProFounder Financial, which launched in December, and now has about 500 startups that make pitches via the site. According to the Wall Street Journal, the average ProFounder donor gives about $1,300, and the average fund-raising effort for each company brings in about $30,000. The company is working with a legal team to lay the groundwork for online equity sales, with the hope that it will dramatically raise the amount of cash pledged by supporters.

Another potential beneficiary is IndieGoGo, a crowdfunding website for creative, cause, and entrepreneurial projects that is especially known in independent filmmaking circles.

In an email interview with Portfolio.com, IndieGoGo co-founder and COO Danae Ringelmann, explained that the company is already growing and expanding, but since its users are interested in buying shares in promising ventures online, it has joined others in petitioning to change the crowd-funding law. Since it launched in 2008, IndieGoGo has run more than 26,000 fundraising campaigns across 171 countries. IndieGoGo charges 4 percent when participants reach their goal, and the companies that raise funds keep their money, no matter how much they raise.

“We don't disclose our financials, but we've disbursed millions of dollars and are really excited about our growth trajectory internationally and with partnerships like President Obama's Start-Up America,” Ringelmann said.

IndieGoGo is a partner in Start-Up America, and as such has offered to help companies and entrepreneurs in the Startup America program by providing participants with the chance to raise a total of $30 million over a three years, plus a 50 percent discount on fundraising campaign fees and resources on crowdfunding techniques.

Ringelmann says IndieGoGo serves as a “complementary” funding source for startups. The site asks those who wish to raise money for their projects to offer some type of non-monetary perk to donors, something of “finite value.”

One of its clients, Mission Cheese, a San Francisco cheese shop, raised $12,000 by offering donors the opportunity to get their names painted on the wall of a wine and cheese bar, while Atlantis Books, which raised $40,000, tantalized donors with a bed at their seaside bookstore should they find themselves in Santorini, Greece. Another company called Satarii Star used IndieGoGo to raise more than $24,000 to prototype their mobile accessory device by offering donors early copies as well as access to the design process.

Ringelmann says that companies can and do run repeat campaigns, and some use it to get past a barrier when they need to expand. One such example is Emmy's Organics, a gluten-free, vegan and raw foods company based in Ithaca, New York, whose twentysomething founders scored distribution into stores across New York with one contingency: they had to change their packaging and branding. With one loan outstanding from the bank, they were rejected for a second, so they turned to the IndieGoGo crowd, offered their macaroons and exclusive perks and raised the $15,000 from customers they needed to redo their branding and packaging.

Such efforts can lead to bigger and better funding.

“Raising a percentage of the total funding need on IndieGoGo is a great way to show market validation, which might make raising money via debt or equity easier,” Ringelmann says.

But now, if the SEC approves the regulatory changes, sites like IndieGoGo and the others could be the ones raising equity, and for young companies such as Emmy's, that could mean a lot of macaroons.

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Teresa Novellino writes for Portfolio.com