In a prior article, Esther Psarakis, founder of Taste of Create raised $5000 in less than a week via Kiva Crowdfunding. So… Crowdfunding comes in three flavors:
- Rewards based – the “crowd” donates money in exchange for a reward. Typically the rewards given by food startups are really pre-orders for their products prior to a full launch.
- Debt based - the “crowd” lends you money and they are basing their decision on your “social” credibility and recommendations… the old honor system.
- Equity based – Title II and III of the Jobs Act allow small businesses to raise up to $1 Million in exchange for a percent ownership of your company.
Esther chose the micro-lending site KivaZip. So I wanted to know why debt vs. equity or rewards and what is different in a crowdfunding pitch vs. a pitch you might give to investors or your banker.
What makes Crowdlending different from traditional debt finance?
Crowdlending really operates on an honor system. Your sponsor is putting his or her reputation on the line when you are recommended for a loan. If you fail to make payments, it not only reflects badly on you and your company, but also on your sponsor. It is also visible on the internet for anyone to see that you are not making those payments.
Frankly, I think that this is an excellent way for a company to become acclimated to the lending process in a far less stringent manner than traditional lending. Also, successfully paying off these loans, will help in your building a strong case when the time may come for you to get a larger loan through a bank or bring on investors.
A Crowdfunding Campaign is different from an Angel or VC Pitch. Although equity investors need an ROI, there seems to be more of a focus on “connecting” with a community or social cause that will resonate with investors. How did you approach building the TOC campaign that made it work for Crowdfunding? Can you give me some examples of essential elements that an entrepreneur needs to address?
It is extremely important to have a compelling business story, sound business reasons people should lend or invest in your company. AND, something about you, your company, its business opportunities needs to resonate with them in order for them to take out their wallet and fund you. It definitely is more of social connection although it is important to ultimately have a strong business case as well. In our case, Taste of Crete has an email list and we sent out an email announcing it. We also put it on our Facebook page. We also revamped our website so it is more in line with our future direction.
What are the things you are now able to implement, vs. impeded in the past, either new product development or product launch with the infusion of crowdfunding?
We have been able to start some R&D on a line of gluten free flavors of our Greek Cookies. We have also used a portion of these funds to help gain new customers such as Shoprite, McCaffreys & Corrado’s.
Any other advice for entrepreneurs seeking to go the Crowdfunding route?
Engage with your lenders/ investors on line…keep them posted on your progress so they feel good about what they did to help you and can see the positive difference it is making in your business. You need to Build a Social Media Marketing Strategy… make sure you already have a good on-line Website. Get your Facebook page up to date and use Twitter as your 24 hour newstream, to be communicating out to your contacts that you are looking to raise capital and once done, keep them abreast of your progress. Personally, it was very moving to see so many people that I did not know lend me a small amount to help us reach our goals. It really democratizes the process since practically anyone who believes in your company can take out their wallet and support you via a small loan, equity investment or a straight donation for a reward. It really is powerful. And I realized that I too have the power on my own scale to give back and help a fellow entrepreneur. I have lent on KIVA and have donated on Rocketlauncher. So spend some time looking on these sites for inspiration for your company…and along the way you may feel compelled to start “pay it forward” as well.