Crowdfunding

What is Crowdfunding?
By definition, crowdfunding is a type of alternative finance, which encompasses channels of finance that are outside of the regulated banking system. Crowdfunding is a method of raising money for a project, cause, venture, or business by tapping into a large pool of investors.These days, that usually means utilizing an online funding platform to collect large numbers of relatively small contributions from a wide swath of people: potential customers, family and friends, or individual investors.

This democratized approach to financing differs considerably from more traditional methods like angel funds, venture capital, or securing business loans from a bank. Rather than pitching your idea, business plan, or market research to a few wealthy, powerful individuals or institutions, an entrepreneur can pitch directly to his target market. In other words, the people who will buy, participate with, or consume the product or service are the same one’s who will help fund it. 

How does it work?
Typically the funding platform is hosted on a website which acts as the middleman between fundraiser and funder. These web-based crowdfunding platforms make it easier to get an idea in front of thousands of potential supporters, and allow funders to easily and securely make pledges. Many crowdfunding platforms are rewards-based, meaning that the fundraiser can offer tiered rewards to investors based on their level of support. OddStory Brewing Co., a local brewery that hosted a successful Kickstarter campaign in Fall 2016, offered rewards ranging from a branded t-shirt for those who pledged $25 or more to private beer tastings and brewing classes for those who pledged in the thousands.

Additionally, these crowdfunding platforms have rules and regulations to keep projects legitimate, focused, and legal. Kickstarter, for example, prohibits projects from offering equity or fundraising for charity, forbids fundraising for politics or illegal contraband, and requires prototype demonstrations for complex manufactured projects. Indiegogo, another major crowdfunding platform, allows fundraising for charity and offers a platform for equity offerings. Kickstarter has a policy that projects must meet or exceed their funding goal, or they receive nothing, and all supporters’ credit cards are not charged for their pledges. On the other hand, Indiegogo allows fundraisers to choose either “all-or-nothing” or more flexible options allowing them to keep whatever amount is raised.

Statistics and Market Impact
In 2015, nearly $2 billion was raised in the United States alone through equity, donation, real estate, and reward-based crowdfunding.  Since its beginnings in 2009, reward-based crowdfunding platform Kickstarter, has raised $2.72 billion for 126,000 successful projects.  While the vast majority of these crowdfunding campaigns raised less than $10,000, a growing number of campaigns are raising hundreds of thousands or even millions of dollars for exciting projects that go viral.

Back in 2012, the Pebble Smartwatch Kickstarter campaign, aiming for a goal of $100,000, managed to raise $10,266,845 from 68,929 backers. “Star Citizen,” an ambitious, space trading and combat video game, raised over $2 million from 34,000 backers in its own Kickstarter campaign. Still unfinished, the video game has continued to crowdfund its development on it’s own site, with a massive $141 million raised via crowdfunding, as of this past January.

Also in 2012, the developers of virtual reality (VR) headset Oculus Rift raised $2.4 million from over 9,500 backers in a massively successful Kickstarter campaign.  Previously, virtual reality had been largely considered a failed ‘90s fad due in large part to unattainable technology, but the new successful Oculus Riff VR system made waves. Oculus was subsequently bought by Facebook for $2 billion, and since then major companies like Samsung, Sony, and Microsoft have been scrambling to develop their own products. Without crowdfunding, an entire multi-billion dollar market may have been unrealized.

Bigger than the Benjamins:
PR, Market Validation, and Learning from Failure

While the most obvious impetus for crowdfunding is money, the methods and mediums of crowdfunding have some ancillary benefits which, for many entrepreneurs, often end up being more beneficial than the actual funds.

“Crowdfunding has several advantages, foremost of which is its flexibility: unlike other types of investment that focus on a specific asset class, crowdfunding can be used to fund a variety of ventures,” says Dr. Phil Roundy, UC Foundation Assistant Professor of Entrepreneurship at UTC. “Other advantages are that it is relatively low risk for the entrepreneur, and it provides a mechanism for entrepreneurs to get feedback from a large pool of potential customers.”

“Crowdfunding is not just about the money; it is primarily a market builder,” says local Treehouse Project co-founder Enoch Elwell. “The important thing is that you’re building up a fan base, a market, and you’re learning from that market. Think of it as break-even community building more-so than making your millions.”

“Crowdfunding is a great way for entrepreneurs to broadcast their ideas and concepts,” adds Variable, Inc. founder and CEO George Yu. “A good portion of those ideas probably won’t succeed, and that’s not bad, because you didn’t lay down everything you have on the line. Even if the campaign fails, you got feedback from some fraction of the market very quickly to learn – ‘Is this a viable idea, or should I rethink it and do something else?’”

That saves people time and capital and overall makes the entrepreneurial environment more efficient. “An entrepreneur should never be afraid of failure,” he adds. “Failure is just another learning opportunity. The most important thing is to make sure you fail with the least amount of capital and time spent.”

Crowdfunding in Chattanoooga
Chattanooga has begun to carve out a name for itself as an innovation hub and thriving entrepreneurial ecosystem. It’s no surprise then that 129 Kickstarter campaigns have been successfully executed in Chattanooga. From coffee shops to emerging technologies, nonprofits and a UX (user experience) design school, these Chattanooga entrepreneurs used crowdfunding to get their ideas off the ground and rally the community to their causes.

Center Centre students collaborate on a daily basis.  |  Co-founders Jared Spool and Dr. Leslie Jensen-Inman reached their goal on Kickstarter in four hours

Photos by Summer Kohlhorst

Center Centre
Center Centre, a new UX design school in downtown Chattanooga,  launched a fundraising Kickstarter in 2014, reaching their goal of $21,700 in a mere four hours, and ultimately raising $133,767 from over 1,500 backers. While that influx of capital was helpful in starting the school, co-founder Dr. Leslie Jensen-Inman says that ultimately, that money was a drop in the bucket. Successful as the campaign was, their primary goal was creating buy-in.

“It was definitely part of an awareness campaign,” says Dr. Jensen-Inman. “It wasn’t necessarily about the money, although that was great and we are so thankful. We wanted to help people feel like a part of a new and different type of educational experience.”

Dr. Jensen-Inman and co-founder Jared Spool approached the campaign like true UX designers: articulating the big picture, their goals, and their audience and carefully crafting tone, graphics, words, and rewards over months before launching.

“If you’re going to do crowdfunding, you have to do all the prep work you can,” Dr. Jensen-Inman says. “A lot of people think crowdfunding is easy – and the people who are reading the updates should feel like it’s easy, just like any good design. But the simple things are actually super complex.”

George Yu has launched 3 successful projects on Kickstarter.

Photo by Stephanie Garcia

Variable, Inc.
Back in 2012, Variable, Inc. founder and CEO George Yu launched a Kickstarter with a goal of $15,000 for the NODE Chroma, a color sensor technology he developed for iOS and computers. According to Yu, crowdfunding is less a valuable capital raising tool, and more a great way to test market reaction to a physical product or idea without having to actually manufacture it en masse, and spend all of your time and capital on an idea that may fail.

“Don’t get me wrong, the money’s nice,” says Yu. “But you’re not really going to make a lot of money from Kickstarter – especially when you’re actually building widgets… But even if you just break even, you’ve paid for a valuable learning experience. We went in knowing that our main goal was to figure out the market viability of the product.”

Though Yu’s Kickstarter campaign succeeded in raising $39,000, the resulting product was not a commercial success.

“We realized that our initial market assessment was wrong,” says Yu. Their tech-friendly Kickstarter supporters were a very narrow representation of the market as a whole, and they were not able to get a broader commercial appeal beyond that base. So, Yu and his team went back to the drawing board, honing their NODE technology into a product with greater market appeal, and ultimately succeeding.

“Even though in this case it didn’t pan out, I don’t think the Kickstarter was a waste,” says Yu. “At the very least, we learned – some portion of the market likes this. And we got tons of feedback from users. So, we learned a lot from the process of actually fulfilling that product and gained competencies that allowed us to eventually reach success. If we hadn’t done the Kickstarter, we wouldn’t have even gone that far. It was the stepping stone.”

Photo by Dotson Commercial

The Open Press
A community co-op, The Open Press offers letterpress, book arts, and printing facilities for the benefit of the community.The Open Press began when founders Matt Greenwell and Paul Rustand joined forces and combined equipment, armed with a dream to create a nonprofit, artistic resource for Chattanooga’s artists and craftspeople. Though a MakeWork grant allowed them to get off the ground in 2012, Greenwell and Rustand quickly realized that they needed a lot more repairs and equipment than they had originally thought, and so they launched a Kickstarter to raise funds and rally community support. In the end, 155 backers pledged $16,242 of their $15,000 goal.

“A big part of our strategy was to be able to give good rewards and be very clear about our tiers and what you were getting,” says Rustand. “Because we did print making, it was easy to make printed materials to give out as rewards.”

The Treehouse Project
Treehouse Project co-founders Enoch Elwell and Andrew Alms started with a crazy idea – build a fancy treehouse that people would pay to stay in. Wanting to test the market to see if the idea was viable, and in need of startup cash, Elwell and Alms launched a Kickstarter in 2014.

“We needed to make sure that this was something that people actually wanted before we built it,” says Elwell. “Also, we didn’t have money.” Ultimately, the campaign squeaked by their $33,333 goal, coming in at just over $34,000. “We just barely made our goal, and we didn’t raise all the money we needed to move forward,” Elwell notes. “It helped us, but really what it did was give us the market validation that we needed.”

Elwell contends that his and Alms’ extensive personal networks combined with Chattanooga’s particularly supportive and generous community all factored into their success, but ultimately, it came down to a good idea. “I don’t know if there’s anything easier to sell than the concept of a treehouse,” says Elwell. “It really sold itself.”

“Crowdfunding is powerful because not only does it democratize investing, but its flexibility also acknowledges that entrepreneurship is much broader than the creation of new businesses – it is about identifying innovative opportunities to create value for society.”

–Dr. Phil Roundy, UC Foundation Assistant Professor of Entrepreneurship, UTC

Photo by Dillan Forsey

Velo Coffee
Velo Coffee Roasters raised $37,000 on Kickstarter to buy a larger coffee roaster that would triple their production capacity.

“We were still a fairly new company, at that stage where it’s still hard to get traditional bank loans,” says Velo roaster Andrew Gage.

“We would never do this again,” he laughs. “It’s just such an undertaking, and watching your campaign succeed or fail on an hour-by-hour basis is nerve-wracking. It takes an emotional toll and you’re biting your nails the whole time. But at the same time, we were blown away by this incredible, tangible support from the community. It was a big morale boost.”

OddStory Brewing Company
“We saw crowdfunding as a good way to push our brand and get the word out,” says OddStory Brewing Company co-founder Jay Boyd. OddStory’s successful $30,000 Kickstarter campaign funded renovations to the taproom at OddStory Brewing Company, and ultimately provided market feedback that redirected Boyd from what he perceived as his target market, to his true target market.

“When you start one of these campaigns, it’s not a sprint, it’s a full-time job until the thing is over, because it’s very easy for it to go stale,” Boyd says. “I think one of the reasons that the failure rate is so high is that people post their idea and hope that it just goes viral, but we knew that once we launched the Kickstarter, that’s when the real work began.”

Photo by Rich Smith

Mad Priest Coffee Roasters
For their part, Mad Priest Coffee Roasters funded the startup of the company nearly entirely through Kickstarter, raising over $36,000 from nearly 300 backers.

“Had we not succeeded, we would not be here,” says Mad Priest founder Michael Rice. “Because no investor is going to come up and say – ‘Congratulations, you failed your Kickstarter. Here’s some money.’”

What does this mean for the business community and the future?
Now is a great time to be an entrepreneur. Across the nation, a confluence of change in economy, technology, and policy has created a fertile entrepreneurial ecosystem ripe with opportunity. Small businesses and startups account for an increasingly large slice of the economic pie, social networks and technological advancements are allowing entrepreneurs to get their ideas in front of more and more people and markets, and policy changes like the JOBS Act, which allows early-stage businesses to offer and sell securities, are starting to open up areas like equity crowdfunding. 

“The emergence of crowdfunding strengthens Chattanooga’s entrepreneurial ecosystem because, by representing an additional stream of funding, it increases the diversity of the ecosystem,” says Dr. Roundy. “In research (with Mike Bradshaw, formerly of CO.LAB, and Dr. Bev Brockman, from UTC) on what makes entrepreneurial ecosystems flourish, we’ve found that the more diverse an ecosystem, in terms of its entrepreneurs, business models, investor-types, and support organizations, the more likely it is to generate a wide array of successful, new ventures and the greater the ecosystem’s resilience to disruptions, such as changes in the global economy.” 

Though not every product, project, or business idea will succeed with crowdfunding, the opportunity is there for those with solid ideas, creativity, initiative, and a knack for marketing. Not only does crowdfunding provide an alternative means of financing projects, it provides budding entrepreneurs with rich opportunities to learn from the process itself and adapt, grow, and ultimately succeed.