Drawing a crowd

Kent Walker used the money to purchase equipment. Brandy McNair financed a trip to a wholesale market in Dallas. Keith Hoelzeman and Jamie Walden paid for various costs associated with their startup.

These are a few local entrepreneurs and small-business owners who have used crowdfunding to generate money to create or grow their businesses. And while the money has been helpful, they have also received something invaluable to their success: validation from the community.

Capitalizing on the recent subscription-box trend, Hoelzeman wanted to create a box offering gourmet treats. He and Walden launched Treatsie in 2013, largely thanks to a successful Kickstarter campaign, which raised more than $7,200.

But for Hoelzeman and Walden, using crowdfunding was less about the money and more about creating a buzz around Treatsie and seeing if there was a market for it. This is an essential, but often unrecognized, benefit of crowdfunding, they say.

“We were looking for honest feedback,” Walden says. “It’s one thing to share the idea with friends and family. We really wanted to put it in front of actual consumers: ‘Is this something you would buy?’ Before we quit our jobs and invested money, we wanted to see if there was a market. That, to us, is the huge value of crowdfunding. You can actually launch [a] product before it’s even a product.”

Hoelzeman, who worked in technology sales, and Walden, who worked in web and graphic design and marketing, did get to quit their jobs. Treatsie subscribers, now totaling about 2,000, are growing about 55 percent month over month, they say.

CREATING A BUZZ

Kickstarter and other crowdfunding websites, such as Kiva Zip, GoFundMe and Indiegogo, offer small businesses, startups and entrepreneurs the opportunity to get funding for their businesses through a collective of community backers. Through the sites, users set up campaigns explaining their ideas, and people pledge financial support. Pledges can often be as little as $5.

This is particularly beneficial for startups because many are unable to get financing through traditional banks, says Jordan Carlisle, entrepreneurship and innovation director at the Little Rock Regional Chamber of Commerce and self-proclaimed “startup evangelist at large.”

“I see [crowdfunding] as a wonderful tool that most people realize is an opportunity to catapult their business idea into something real,” Carlisle says. “Members of a venture have leveraged crowdfunding as way to bring awareness, raise money and validate the market for their business.”

For some sites, such as Kickstarter and Indiegogo, pledges are essentially donations, and rewards can be provided to donors in return. Others, including Kiva Zip, offer interest-free loans, where backers are repaid.

Carlisle says crowdfunding helps businesses realize the market for their ideas and get feedback from the community.

“Owners don’t put all their chips on the table, and people who back it can do so on their terms,” he says. “It’s not about the money; it’s about the belief in the idea. It’s two-fold. You get the capital and that support from people.”

Whitney Horton, business consultant at the Arkansas Small Business and Technology Development Center at the University of Arkansas at Little Rock, says crowdfunding is good for some startups but not everyone.

“People think it’s easy to do,” she says. “It’s a buzzword, and people see successes and think, ‘I can do that, too.’ But it’s difficult.”

Horton says having a compelling story or unique business idea is essential to a successful crowdfunding campaign. “You have to stand out among everyone,” she says.

She encourages people thinking about using crowdfunding to research the various platforms to find what works best with their business model. She says some sites charge fees, and most don’t allow receipt of partial sums, so having a plan B is also important.

Because startups are risky, crowdfunding may sometimes be the only option for some, Horton says. Banks usually won’t take the risk, personal finances can affect business lending, and through crowdfunding, business owners do not have to sacrifice equity or ownership, she explains.

COLLECTIVE LENDING

Entrepreneurs and owners of existing small businesses use crowdfunding for many reasons. Some pay for equipment or startup costs, while others invest in growing their business.

When she created her artisan-jewelry business, Bella Vita Jewelry, in 2008, McNair says she started small and continued working a part-time job while the business grew. In July 2013, she became self-employed full time, and in October 2013, she set up her first Kiva Zip loan campaign for $5,000.

McNair used the loan, which was disbursed in January 2014, to attend a wholesale fair in Dallas with the intention of writing enough orders to cover the loan and grow her business. She now has a shop in the Lafayette Building in downtown Little Rock. She says the interest-free loans offer small businesses like hers nothing to lose.

“It’s a safe way to try to grow business,” she says. “It’s a really good way to get some extra revenue. I know I can pay this loan back in the time period, and I’m not paying extra money like bank interest.”

Kiva is a nonprofit that has been providing micro-financing to overseas organizations for years, and in 2011, it began offering crowdfunded zero-percent interest loans in the U.S. through Kiva Zip, says Dani Folks, a Kiva fellow for Arkansas and student at the Clinton School of Public Service in Little Rock.

“It’s social underwriting,” Folks says. “Before banks were in the picture, this is how lending was done.”

Folks says Kiva often works best for startups with tangible products, such as those produced by craftsmen, artisans, food producers and farmers. She says the application process has many steps and not everyone is accepted. Loans must be repaid within two years, and if their first Kiva Zip loan was dispersed, startups must repay it before starting a subsequent one. Volunteer trustees endorse candidates for loans and help them through the process of planning and promotion.

The Central Arkansas New Agrarian Society works with local food-related startups as a Kiva Zip trustee group and has helped startups acquire about $80,000 in loans, says member Bo Bennett.

“We look for businesses that will impact local foods or growers that will benefit from Kiva to increase local food production,” he says. “Crowdsourcing is not just about money. It’s building a social network. The No. 1 reason a crowdsourcing [campaign] fails is lack of communication. Part of the game is building a culture around a concept.”

Bennett, who also manages the Bernice Garden Farmers' Market in Little Rock, says he loves helping startups expand their social networks. Bennett used Kiva for a $5,000 loan to start his cold-press juice business, Garden Press, in early 2014. He is now in the process of selling the business and paying off the loan, but he plans to start a medicinal herb business soon and will use Kiva once his first loan is repaid.

McNair repaid her first Kiva loan last fall and has set up a second campaign for $10,000 so that in August she can attend New York’s NY Now show, which showcases exhibitors’ home, lifestyle or gift products. The loan was 10 percent funded as of March 9, and the campaign ends later this month.

To promote her first Kiva campaign, she used Facebook and an email newsletter. She says she doesn’t like asking people for money and felt more comfortable with the repayment aspect of Kiva instead of Kickstarter. But the second time around, she says the campaign is going more slowly.

“I’m just torn about how often I should post it on social media,” she says. “I don’t want to bombard; I don’t want to beg. I don’t want to over-ask or over-promote.”

Walker has also used Kiva Zip to expand his business, Kent Walker Artisan Cheese, which started production in 2011. His loan was disbursed in April 2013, and he purchased a new cheese vat to boost production.

“Crowdfunding is a wonderful way for entrepreneurs to get some funding,” he says. “You have to get a bunch of people interested in it. It’s an act of good faith.”

Because business has grown, Walker plans to soon open a tasting room at Fourth and Cross streets in Little Rock. To help, he has created a Kickstarter campaign, which ends Wednesday, to raise $10,000. As of March 9, he had raised more than $12,700.

REWARDING BACKERS

Walker says he chose Kickstarter for his second crowdfunding experience because he will not repay his Kiva Zip loan until this spring. He’s been using social media, his website and talking to anyone he meets to promote the Kickstarter campaign, he says.

“[Crowdfunding] is a good way of doing things,” Walker says. “It’s a shame that the banking system isn’t set up to support entrepreneurs, which are helping to drive the economy. I’m in a position to pay back the loan and provide rewards to the Kickstarter backers.”

Through Kickstarter, GoFundMe and others, owners can offer backers various tiers of rewards for contributing. Local entrepreneurs say creating appropriate rewards that are cost-effective is essential.

“The biggest difference is creating good rewards and being ready to make good on them, and not lose money,” Walker says.

To promote their Kickstarter campaign, Hoelzeman and Walden used social media and set up a landing page on the Treatsie website to collect email addresses. Walden says by the time Treatsie launched, it had a list of a few hundred people who were interested in the business.

“Sometimes, people get into the trap and put all the focus into the launch, but no one is looking at you because you haven’t done any audience building beforehand,” Walden says.

They used the money from Kickstarter to pay some of the minor costs of starting Treatsie, which Hoelzeman says can add up.

Hoelzeman and Walden say the feedback received via Kickstarter helped them determine and re-evaluate the rewards they were offering. Hoelzeman says many people just wanted the Treatsie boxes, without items such as T-shirts and stickers, so they amended the reward tiers.

“People are not going to pay much more than what you’re worth,” Hoelzeman says. “We budgeted not to lose money on tiers.”

While Kickstarter campaigns usually include rewards for levels of contributions, Carlisle says there’s no guarantee that individuals will receive rewards. That’s where a startup’s preparation and planning comes into play, he says.

“This is people’s money, and you have to respect it and take it seriously,” Hoelzeman says. “People put their trust in you. You’re asking them to buy into what’s now an idea that you’re trying to turn into something. If you abuse that trust they are placing in you, they’ll tell 100 people. Kickstarter only works when the community has trust and faith in an idea and people are fulfilling obligations.”

Hoelzeman says not planning and budgeting for rewards can be detrimental, and if rewards cannot be delivered, it “poisons the well.”

“Once the campaign is funded, the work doesn’t end,” Horton explains. She says backers must also understand the risks of startups.

“It’s a lot more work than people think,” she says. “Many think all you have to do is go live and the money is going to start pouring in. You need a good online presence. Just because it gets funded doesn’t mean the business is going to work.”

The closure of Hot Dog Mike’s River Market District storefront in February 2014 after opening the previous fall is an example of this. Owner Mike Juliano, who previously ran a mobile hot dog cart, raised about $11,000 through GoFundMe in June 2013.

Carlisle says crowdfunding campaigns have the potential to go viral, but not every campaign does. He says some platforms’ algorithms push campaigns to the site’s front page or onto a trending list if they are partially funded, so it’s important to have some backers on board before launching to get more exposure.

“There are tons of campaigns going, most of which do not have very much funding or support,” he says. “They didn’t prepare as much. Everything I’ve seen or read emphasizes preparing before the campaign.”

While crowdfunding seems trendy right now, it can be beneficial by providing financial backing and community support, and it’s here to stay — though it will likely continue to evolve.

Carlisle says in the future, crowdfunding could possibly allow backers to buy in and gain ownership in startups, something not currently allowed for sites marketed to the general public. He says legislation would be needed for that to happen.

Bennett says we haven’t seen the full effect of crowdfunding. He says millennials in particular are realizing crowdfunding’s potential, and as generations shift and millennials come into positions of power and influence, new networks will develop.

“It’s got some staying power,” he says. “As long as people appreciate and encourage open-source ideas, we’ll see it continue to grow.”