Crowdfunding: So far, so good

Businesses test the crowdfunding waters, and some even dip their toes in twice.

From the pages of In Business magazine.

Wisconsin has taken its share of lauds and lumps in the last decade, but one refreshing business development out of the Capitol was the state Legislature’s recent decision to rewrite state securities law to advance Internet crowdfunding opportunities for new, in-state businesses. The Wisconsin Crowdfunding Law took effect on June 1, 2014.

In general, crowdfunding allows people to make financial donations to causes or businesses they support. In campaigns launched through rewards-based models such as Kickstarter or Indiegogo, backers receive a small reward from the company in return for their support.

In contrast, Wisconsin’s new rules address equity crowdfunding, allowing state residents to purchase an ownership stake in a startup business they believe in. Prior to the new rules, only high-net-worth individuals were able to purchase shares in companies.

The equity crowdfunding rules allow a new business to raise up to $1 million, or up to $2 million if it has had an audit in its most recent fiscal year and made the results available to the Wisconsin Department of Financial Institutions and prospective investors. Investments must be made through an in-state Web portal, and funds are held with a third-party escrow agent, or bank.

The idea is so new that few businesses have explored the waters yet, while rewards-based crowdfunding thrives online. IB takes a look at the some of the local players that have dipped their toes in the water thus far.

The deal crafter

CraftFund LLC is an online crowdfunding Web portal based in Milwaukee that targets Wisconsin food and beverage businesses as well as commercial real estate and urban redevelopment.

The company incorporated in 2012 and went “live” in October of 2014. “We assumed we’d be doing this nationally under the federal JOBS (Jumpstart Our Business Startups) Act, says David Dupee, the company’s founder. However, when it became clear that the national effort would take some time, Dupee turned his focus toward getting one of the first intrastate exemptions passed right here in Wisconsin.

A similar movement was underway in both Georgia and Kansas at the time, so Dupee, 33, asked his friend, State Rep. Dale Kooyenga, R-Brookfield, if the Legislature would consider something here. Kooyenga put Dupee in touch with State Rep. David Craig, R-Town of Vernon, who had already been working on a plan. “I was in the right place at the right time,” Dupee acknowledges. “They were looking for someone to spearhead the bill, so I was involved with that.”

The Legislature passed the new crowdfunding law without opposition, and since then other states have followed suit. “Since Wisconsin passed its law, I think about 20 other states have done the same. It’s an incredible trend,” Dupee says.

The food-and-beverage sector is a particularly good candidate for equity crowdfunding, which capitalizes on the buy-local, consume-local consciousness. “This is the first time the general public can make investments in private companies,” notes Dupee. “It will resonate with millennial investors because they’re familiar with Kickstarter, so they’ll jump on first.”

Investors are limited to a maximum investment of $10,000, unless they are considered an accredited investor or certified investor (e.g., a high-net-worth individual), at which point there are no limits.

With equity crowdfunding, if a campaign does not meet its stated goal, investors have the right to either cancel their investment and have their funds returned, or proceed.

With craft brewers becoming more and more adept at connecting with their local consumers, many are taking advantage, Dupee says. “In craft beer, you see this rush. The producer and consumer want to connect with each other, and I think this is the final bridge. It’s been happening in the United Kingdom for years. Some U.K. brewers are raising incredible sums of money by turning customers into owners. That’s why I think you see the big brewing companies losing some market share.”

Real estate is another area that’s primed for crowdfunding, Dupee says. The sector is traditionally popular with accredited investors, but Dupee believes the ability for non-accredited investors to jump in makes sense for the same reason food and beverage ventures work — it’s about supporting a tangible project located in their backyard.

Currently, a company looking for investors will pay between $1,500 and $2,500 for a three-month listing on the CraftFund website. That money also covers necessary background checks and provides access to 450 Wisconsin investors registered on the site.

Unlike rewards-based Kickstarter, which retains a back-end-success fee of 5% of total campaign funds raised, CraftFund is not allowed to collect such fees.

“We think that as regulations evolve, there will be an ability to take a back-end-success fee,” Dupee states. “That’s where the business model starts to work, but to get in there, we really just want to be at the forefront of this and be known as a leader in investments for the general public and food and beverage companies in particular.”

CraftFund is Dupee’s first business venture, and he admits he took a big risk since laws and rules are still being defined and tested. “But I come from a family of entrepreneurs. I went to law school, and I’m glad I did, but I found my interests were more in creating a business. As frustrating and slow as this has been, I enjoy the process of building from the ground up.”

He dreams of taking CraftFund national, as laws change and evolve. “Wisconsin is our pilot market. We’re just trying to test the concept at this point.”

(Continued)

 

The first trial: MobCraft Beer

MobCraft Beer co-founders Andrew Gierczak, Henry Schwartz, and Giotto Troia will open a taproom in Milwaukee later this year.

Much has been written about Wisconsin’s first crowdsourced brewery, which encourages consumers to submit recipes for new beers and vote on beers the company will brew and distribute.

MobCraft had been looking to start a rewards-based Kickstarter campaign until the co-owners learned about the benefits of equity crowdfunding. Using CraftFund as its online Web portal, the company attracted a devoted fan base that not only visits the company’s website for its beer, they own a piece of the company. “[Equity crowdfunding] helped us out financially,” says Henry Schwartz, MobCraft co-founder and CEO. “Our product is in the hands of more people, and now we have investors that have a vested interest in the company.”

It took a while to get the campaign rolling. The brewer had hoped to launch in June 2014 after learning about the bill that was signed into law in November 2013. When June came along, MobCraft still hadn’t found a bank willing to be an escrow agent. That’s when Monona State Bank stepped up to the plate.

Paul Hoffman, Monona State Bank president and CEO, says they just decided being able to help crowdfunded companies was simply an extension of what the bank did every day. “The role of the bank
is to be a fiduciary,” he says. “So the money people invest gets doled out until it needs to be distributed or returned. It’s a different format, but the basics are the same.”

Hoffman says that to the best of his knowledge, Monona State Bank is the only Wisconsin bank currently active in the crowdfunding realm.

MobCraft hoped to generate between $250,000 and $500,000 by selling 142,857 shares of its Series B stock at $3.50 per share, but the campaign fell short, raising just $75,000.

The 52 investors then had a choice: ask for their money back, or continue supporting MobCraft’s efforts. Just a handful pulled out, while 48 remained committed. When all was said and done, and after bank fees, the brewer ended up with about $68,000.

“I really feel like crowdfunding was worth the effort that was put into it,” Schwartz says. “We have a tangible product, and it was great because we could get in touch with our direct consumers. With our model of a crowdsourced brewery, we not only have fans that come to get beer ideas, but also fans that own parts of our company and are really interested in being advocates for the entire model.”

Recently, MobCraft announced it would be opening a new shop and taproom in Milwaukee after efforts to find a suitable location in Madison failed. “We’re not abandoning Madison,” Schwartz says, “we’re just moving our production.”

Yummy money: Yumbutter

Yumbutter’s Adrian Reif, left, and Matt D’Amour are now offering nut butters in a pouch, below.

When we first met Adrian Reif as a startup businessman in 2011, he was setting up space for his organic peanut butter operation at Main Street Industries in downtown Madison. Filling each jar by hand — with an ice cream scoop — he was excited about his recent acquisition of a 44-quart mixer that would ground 30 pounds of peanuts in about five minutes.

The nut-butter company launched in 2010 and had a few successful years under its belt by the time it tried Kickstarter for the first time. “[Our nut butters] were in about 30 retail stores back then, so we were still pretty small,” notes Reif, founder and “chief goodness warrior.”

Yumbutter products were on select store shelves around town, but the company was looking for a niche to propel it into the future. In 2012, Reif and business partner Matt D’Amour launched the idea for Yumbutter Go, a stand-up pouch sold in three varieties of nut butter “potions,” such as peanut butter made with chia, hemp seeds, and goji. “No one else was doing [a pouch] in the nut-butter category,” Reif says, admitting they had no idea how to do it, just that if they didn’t do it, someone else would.

As they shopped the idea to grocers, the concept wasn’t sticking, and it became clear that they needed product prototypes so people could see and feel what they envisioned. “That’s when we decided to go to our fan base and our friends to see if they really thought this was viable,” Reif says. “We decided to do a Kickstarter project to raise $18,000 that would allow us to get our pouches printed and manufactured so we could get them out to the grocery buyers and provide samples.”

In that first iteration, 2,000 packets were produced and distributed at trade shows and offered as free samples. Reif managed the entire campaign, from planning the video to pre-launch emails to the launch party. “Our fans put their money where their mouths were,” he says.

Different rewards were offered based on giving levels, from being included in a photo collage of Yumbutter backers to earning six food samples and a Yumbutter water bottle (for a higher pledge). The campaign generated about $7,000 in the first four days, and almost $20,000 from 372 investors over the course of a month.

“We ended up with about $17,500,” Reif reports, after both Amazon and Kickstarter took their cuts. More importantly, he and D’Amour were able to expand production of Yumbutter Go.

Yumbutter now is in about 600 stores nationwide, and that number could nearly double by year’s end thanks in large part to an agreement with Target, which Reif says will add the product to over 350 store locations in July.

The company now operates out of office space on Atwood Avenue. Reif still has the original 44-quarter mixer from his startup days, but now the product is being produced at the Wisconsin Innovation Kitchen in Mineral Point — where people with disabilities help in various stages of food production — and in California, where Yumbutter Go is produced.

Would he do Kickstarter again? Definitely, Reif says. “Except right now, there’s no time. Now we have a bigger customer base of about 2,000 people across the country. We could easily do a $60,000 campaign in the future, but we’ve been so focused on current growth.

“Traditional capital is great, and banks are great, but I think more and more, people want to invest and support people who are doing cool things.”

(Continued)

 

Buzzing along: Mad Urban Bees

Nathan Clarke of Mad Urban Bees will soon be raising queen honeybees.

Nathan Clarke of Mad Urban Bees is another Kickstarter fan, having run two successful campaigns on the website.

His first, launched over the holidays in 2011, probably wasn’t the best-timed campaign, he admits. Still, he surpassed his $7,000 goal by $3,000, and used the money to purchase beekeeping equipment, a trailer and, more importantly, bees.

His second campaign, titled “Save The Queens,” just concluded in April. The goal was $8,000, and he raised over $17,000 from 263 backers. “No one is raising queen honeybees commercially in Wisconsin,” Clarke says. “I felt there was a need. To be able to access queens is a large advantage.”

Typically, queens are raised in warmer climates, he explained, and cost between $25 and $30 each. By next year, he’d like to be raising between 100 and 150 queens so he can generate more hives, support more local farms, and produce more urban honey.

Clarke learned a lot between his two campaigns, particularly when it came to defining his target audience. “The first time, I had no idea. I probably had about 50 likes on Facebook at the time, and now I have about 6,700. So my reach in round one was vastly different than round two. I put a video together but was new to social media, so I was figuring out the business along with trying to raise money. I wasn’t a professional yet, and I’d never really done this.”

The second time around, people knew who he was and knew he was operating one of the few urban apiaries in the nation, providing honey from over 80 hives placed throughout the city. “Many feel that what I’m doing is important, and that gives me fodder for future campaigns.”

Better days ahead: The Conscious Carnivore

A cut above: The Conscious Carnivore hopes to expand its business through crowdfunding.

When Bartlett Durand of Black Earth Meats was struggling to keep his slaughterhouse business afloat, he launched a Kickstarter campaign hoping to raise $225,000. He didn’t come close.

“We were stuck in the middle,” Durand says. “We had people suggesting we raise a million dollars to build a new facility, but that seemed out of reach. The $225,000 was the minimum we would need to keep The Conscious Carnivore [the company’s retail store] operational. Anything less was just a band aid that wouldn’t keep the doors open.”

Just over $91,000 was pledged. In rewards-based programs like Kickstarter, if goals are not met, money is returned to the investors.

In hindsight, Durand, now business manager at The Conscious Carnivore Food & Grocery, wishes he would have launched the campaign sooner, “when people were really paying attention” to the fight ensuing with the Village of Black Earth. The village forced the meat processor to close, citing “public nuisance” issues. With his company in peril, Durand says that by the time he completed a video for Kickstarter and set up the rewards package, the initial momentum was lost.

But while Black Earth Meats couldn’t collect the cash, it was able to retain many donors by quickly launching a donation site on its own website. The financial support received allowed Durand to keep the bank at bay, start selling off equipment, and buy the time necessary to sell The Conscious Carnivore to a new, friendly investment group.

Durand is excited about the opportunities the state’s new crowdfunding law will bring, saying it allows people to invest in their local communities. “We get a lot of inquiries about opening up a Conscious Carnivore [elsewhere], but it is beyond us now to finance those stores,” particularly if they’re in unfamiliar communities, he notes. “By having a community invest directly in a store … the market research is done simultaneously with the investment raise.

“To put it another way, I would rather have 500 people invest $1,000 each in a new store, than five people investing $100,000 each. We would then have 500 people committed to the success of the store as customers, evangelists, and potential employees.”

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