Boulder Companies Get a "Kickstart" with Crowdfunding
Some local companies are cashing in on an unconventional financing method, raising money through crowdfunding.
KUNC's Erin O'Toole talks with Boulder County Business Report publisher Chris Wood about this innovative way to raise funds.
Erin O’Toole: So maybe we could start out by defining crowdfunding. What exactly does that mean, and how big a role does it play in the economy?
Chris Wood: Essentially, crowdfunding involves raising what are usually small amounts of money from a lot of people via the Internet or social media. A number of crowdfunding websites exist, and there are even websites to rate these crowdfunders using various criteria.
In terms of how crowdfunding impacts the overall economy, we could look at one of the largest crowdfunding sites, Kickstarter, which launched in New York City in 2009. Since that launch, more than two and a half million people have pledged more than $350 million dollars to fund more than 30,000 projects. So it’s becoming a major factor in how companies raise money.
O’Toole: These sites obviously are filling a void in terms of small-business financing. How are local companies using these systems?
Wood: A number of local companies have used Kickstarter to raise money to buy equipment or to help them with startup costs. One example is a Boulder natural-products company called The Naked Edge. Co-founders John and Lisa McHugh raised $13,000 dollars through Kickstarter to purchase equipment to produce organic fruit and vegetable snacks.
That modest amount of money gave the company the funds it needed to expand, and the founders tell us that they were able to add 10 new stores as outlets because of that increased capacity.
O’Toole: So can anyone go onto these crowdfunding sites to raise money for anything?
Wood: Each of these crowdfunding sites has its own criteria for what can get funded. In the case of Kickstarter, anybody can apply online with a creative project and how much they want to raise, as well as a funding timeline, and anybody can fund a project. The entire amount goes to the applying company, minus Kickstarter’s 5 percent fee, but only if the fundraising goal is met.
Another site, IndieGoGo, was used by Louisville-based White Girl Salsa to raise $18,000 dollars. Founder Julie Nirvelli told us that she used IndieGoGo because she was able to use the funds regardless of whether she met the total goal.
O’Toole: So people fund these projects, usually in small amounts of money. What do they get in exchange?
Wood: Some companies provide a tangible product in exchange for the money. The Naked Edge gives funders a certain number of their snacks. Other companies provide T-shirts, products or things such as factory tours.
O’Toole: Companies obviously benefit by raising money to fund small projects. Can larger sums also be raised?
Wood: Some companies are raising more substantial sums, and even a modest project can lead to bigger money. With The Naked Edge, its Kickstarter proposal led it to a bigger investor. A Florida company offered it a future investment of up to $150,000 dollars and a partnership after it saw the Kickstarter campaign online.
But the whole crowdfunding concept got a major boost in April, when Congress passed the federal JOBS Act. That law allows startup companies to raise up to $1 million online, and to offer equity in exchange, as long as they meet certain rules. That law is about to go into effect, and it’s expected to drastically increase crowdfunding activity. But it also presents a lot of challenges.
O’Toole: Could you give an example of what some of those challenges are?
Wood: Sure - writers in Forbes magazine recently called crowdfunding a potential legal disaster waiting to happen. They’re concerned about a lack of disclosure by companies raising money, and they’re worried that smaller investors won’t have the savvy to fully vet these crowdfunding equity proposals.
But crowdfunding is poised to take off even more than it has. Several new companies have emerged in Boulder to provide financing for startups, planning to take advantage of the JOBS Act.