Small Business: Crowdfunding can give company owners a boost, but challenges follow Crain’s Cleveland Business By SHARON SCHNALL 4:30 am, August 11, 2013 A crowdfunding campaign helped Christine Zadnik Mehling move her 7-year-old home-based designer and artisan baking business, Better Bit of Butter Cookies, from Cleveland Heights, to a shared retail and work space in South Euclid. Her online campaign, through Kickstarter, complete with a polished video pitch, raised just more than $11,000 in 30 days. By mid-July 2012, 195 backers pledged toward her relocation project, exceeding the stated goal of $9,800. “I wanted to show the conditions I was working under at home and how my product was doing,” she said. “I was very saleable, and I needed to move and grow.” Kickstarter, Indiegogo and other online crowdfunding platforms enable campaigning entrepreneurs, like Mrs. Mehling, to potentially connect worldwide with donors. In exchange for financial backing, supporters are typically promised a reward, often their business's product; and a delivery date is identified. Eligibility, fees and campaign lengths vary among platforms. What is constant, beyond visibility, is financial access when avenues, like the bank, are not available. Mrs. Mehling said roughly 75% of her backers were complete unknowns; the remainder were friends and clients — only a handful family. “I found it easier to have a platform to present to people what I do and see if I could raise the capital that way,” she said. “I didn't want to go directly to a friend and say, "Would you give me $5?' ” More than $5: support for her project averaged $57 per backer. Adept crowdfunding campaigners can leverage the campaign's reach, through online posting and re-posting by friends, friends of friends, families, friends of family, clients, colleagues and eventually total strangers. Post-fundraising challenges “For some people it's the right technique; for some people it's a disastrous technique ... for the (entrepreneur) there are a lot of challenges,” said Ethan Mollick, assistant professor of management at the Wharton School of the University of Pennsylvania. Even when campaigning entrepreneurs meet or exceed financial goals, there are other challenges: having a large or greater-than-expected supporter following; supporter connectivity to the entrepreneur; and supporter expectation regarding timely reward fulfillment. Simply put, the supporter is drawn to the campaign, intrigued by the product and willing to support the effort, but expects timely reward delivery. Ongoing communication about the business is desired — not just about reward fulfillment. “(Supporters are) special customers,” said Ken Burns, electrical engineer and owner of TinyCircuits of Akron. “They're between an investor and a customer.” Campaign supporters are not angel investors or venture capitalists; they do not have equity stakes in the business, Mr. Burns said. Still, they need to be brought into the process, receiving explanations of where the owner is in meeting campaign goals, he added. “You're engaging a group of people who want to help you. If you're just asking them for money, then I think you have the wrong goal,” said Dr. Mollick, who studies innovation and entrepreneurship and is the author of a soon to-be published paper called “The Dynamics of Crowdfunding: Determinants of Success and Failure.” Like Mrs. Mehling and her bakery, Mr. Burns met industry criteria of successful crowdfunding: his 30-day Kickstarter campaign, to turn electronic prototypes into manufactured products, in fall 2012, realized $109,700 from 1,186 backers, surging almost $100,000 beyond a $10,000 goal. His TinyDuino products, offered to Kickstarter supporters of a certain level, were highly miniaturized circuit boards that could be used for building customized products like robots or wearable sensors, for example, when embedded into a designated computer framework. Although 75% of Mr. Burns' backers were familiar with the products' technical capabilities, “well under 1%” were people that he knew; approximately 50%, he said, were from Canada and overseas. But, buyer and campaigner beware: good-intentioned campaigners and quality products may not translate to timely reward fulfillment and frequent communication. Delivering the goods Kickstarter generates the largest volume of crowdfunding activity both in successful campaigns and associated monies; Indiegogo is its closest competitor in terms of activity, said Justin Kazmark, a spokesman for the New York City-based Kickstarter. “Over 96% (of Kickstarter campaigns) actually deliver what they said, but not on time ... less than 25% do (deliver) on time,” said Dr. Mollick, who studied 48,526 Kickstarter projects representing $237 million in funding pledged. Mr. Burns and Mrs. Mehling each described a predominantly supportive and congratulatory funder base; they also experienced delays in reward fulfillment — not surprisingly, funder rancor followed. “You get instant feedback from Internet customers,” Mr. Burns said. “Let's just say people can be harsh on the Internet — they can be quite frank.” In Mrs. Mehling's case, her professional priorities were divided among serving an existing customer base, renovating and opening a new retail space and serving the new campaign contingent. Similarly, Mr. Burns juggled the demands of a then full-time job elsewhere, opening his new business space, staff training and new product manufacturing. “One of the problems: There is volume,” said Bob Cohen, CEO of the Braintree Business Development Center of Mansfield. “Additionally, things can happen so quickly in crowdfunding ... (the campaigners are) not geared to meet that demand.” Braintree serves technology entrepreneurs within a 21-county Northeast Ohio region. A business technology incubator, it is part of the JumpStart Entrepreneurial Network. Dr. Cohen likens sudden crowdfunding success to that of a small farmer, approaching a grocery store buyer about selling produce at the local store, only to be offered a contract for all store locations and being unprepared to meet that demand. “People wanting working capital for a product, they don't know how long this (reward fulfillment) is going to take,” said Dr. Cohen, who works with small business owners seeking to launch crowdfunding campaigns. “Everything takes longer than people expect; everything ends up taking longer because there are so many pieces, so many components.” The power of communication Ultimately, crowdfunding supporters want to see the business owner succeed, said Rachel Kacenjar, owner of Re/Dress, an online plus-size modern and vintage clothing store, currently operating out of Ms. Kacenjar's Old Brooklyn home. This past March, Ms. Kacenjar raised $27,110 through 609 funders, using another online platform, Indiegogo of San Francisco; in 22 days, she exceeded a $25,000 goal. She sought support to: reopen the formerly New York City-based online business, one that she had purchased and previously been employed with as vice president of e-commerce. Other campaign goals were to increase product offerings and open a brick-and-mortar location. To date, the first two goals have been met; a Tremont retail location opens this fall, she said. Ms. Kacenjar, previously an independent professional fundraiser for nonprofits, was familiar with customer dynamics. She had some fulfillment difficulties, but managed reaction, for the most part proactively, with ongoing communication through personal and professional Facebook accounts, Twitter and her Indiegogo site, and one-on-one communication when needed. The result, she said, “was a tight-knit donor relationship.” But, communicating takes time; time when the crowdfunding entrepreneur is too exhausted to consider blogging to campaign followers. “You are not going to have free time because of the work involved with a crowdfunding campaign,” Ms. Kacenjar said. “I felt like I was going to have to put in the work — the campaign was my job.” © 2013 Crain Communications Inc. Crain's Cleveland Business http://www.crainscleveland.com/article/20130811/SUB1/308119998