Can local crowdfunding startups compete in a crowded field?

When people think of crowdfunding platforms, Niles Heron wants them to think of shoes. Different pieces of footwear for different jobs. That's why he thinks his new crowdfunding startup, MichiganFunders.com, is a winner in an increasingly crowded industry.

"None of them are Michigan unaccredited platforms," Heron says. "We say crowdfunding like its a general word, like shoes. We make running shoes. I'm not trying to compete with people making stilettos."

MichiganFunders.com is the Great Lakes State's first-ever equity crowdfunding platform for both accredited and non-accredited investors. An accredited investor is a person with a defined level of wealth who is certified to stake money into high-risk investment vehicles, like venture capital funds. Non-accredited investors are typically people of more modest financial means who wish to invest in a business or enterprise. MichiganFunders.com is an online portal that allows investors with pockets of nearly every depth to help bankroll Michigan-based startups, small businesses, and real-estate developments in exchange for a piece of equity in the venture. The new crowdfunding platform is set to launch later this month.

"The difference between us and Kickstarter is that Kickstarter is playing a blanket-volume game. We are playing a curated deals game," Heron says. "I don't care how much we raise. I want to help small businesses."

MichiganFunders.com already has six small businesses ready to raise money, ranging from a sushi restaurant looking to open in Detroit's Corktown neighborhood to a residential real-estate development. Another dozen are in the pipeline. By law, companies can crowdfund between $50,000 to $2 million, but Heron believes most of the MichiganFunders.com's campaigns will raise in the lower end of that spectrum.

Michigan's state legislature just recently passed Public Act 264, which allows companies to raise seed capital from non-accredited investors. That opens the door for companies to crowdfund their startup costs without the help of accredited investors, such as angel investors or venture capitalists.

"We don't target venture capitalists," Heron says. "We target the 10 million people who live in this state. But that doesn't mean we don't want to include them (VCs and angel investors)."

Crowded times in crowdfunding

Crowdfunding as a means to raise capital for businesses and projects went mainstream in the early years of the Great Recession, when bank loans and investments dried up. It became a viable way to raise a few thousand dollars to cover startup costs at a time when traditional lenders went turtle.

Rewards crowdfunding was the main vehicle for attracting funds. An entrepreneur or project leader would create a crowdfunding campaign offering to exchange rewards (such t-shirts with the project's brand or naming rights) for differing levels of giving. The process proved quite successful for some, but less so for most others. That's because donors were just that, people who gave without an expectation of financial return. Equity crowdfunding, where donors could get a stake in a venture or company, was hampered by local and federal regulations on who was legally permitted to invest.

Metro Detroit was an early adopter of the crowdfunding trend. The folks at the Imagination Station in Detroit raised $67,436 on Kickstarter in early 2011 to build a statue of Robocop, an effort that garnered national media attention. Ann Arbor-based tech startup Pinoccio raised $105,322 on Indiegogo to fund the production of a wireless microcontroller. Detroit-based furniture startup The Floyd Leg raised $256,273 on Kickstarter for its innovative table leg. Ann Arbor-based Avegant raised $1.5 million through Kickstarter for its virtual retinal display technology.

Money raised through crowdfunding has grown by leaps and bounds since then and has now become a mainstream source of early investment. Crowdfunding is attributed with raising billions of dollars in each of the last few years. Kickstarter, the big player in the space, averaged $1.5 million in pledges per day in the third quarter of last year, according the company's blog.

Which means a tsunami of startups have entered the crowdfunding industry in just the last four years. Each startup has its own strategy for raising money online, often carving out a particular supporter niche. But what many of these companies are discovering is that crowdfunding is a lot harder than it looks. 

"It's super competitive," says Chris Blauvelt, a Detroit-based entrepreneur working in the crowdfunding space. "I think every year there are another 100 crowdfunding sites launched. If you don't have a clear value proposition it's hard to stay afloat."

LaunchGood

Blauvelt launched Patronicity and LaunchGood 18 months ago from the Green Garage in Detroit's Midtown neighborhood. Both are crowdfunding sites. Patronicity focuses on presenting local projects to a local audience so they don't get lost in the shuffle of larger crowdfunding sites. LaunchGood is a crowdfunding platform that serves the Muslim community.

LaunchGood has proven successful thus far, raising $1.7 million for 140 projects across the U.S. Patronicity has proven to be a bigger challenge. It has raised $500,000 for 40 projects in metro Detroit.

"All local wasn't as big of an appeal as we thought," Blauvelt says. "We have shifted more toward civic crowdfunding, like parks and bike paths."

It also helps that Patronicity brokered a deal with the state of Michigan to promote those sort of projects. For instance, it helped raise $52,000 for a green alley project in Midtown last year. Today 80 percent of Patronicity's projects are focused on community space redevelopment. It's a key driver in helping the company attract A-level projects.

"When you get good projects they end up recruiting more good projects," Blauvelt says.

A-Level projects

Stephen Roginson knows a thing or two about good crowdfunding projects. He has helped lead two successful drives, including $25,000 to help launch his nano brewery in Detroit, Batch Brewing Co.

When choosing which platform to use he considered options both big and small. At the time Kickstarter would only let users keep the money if they reached their goal, so Roginson ruled it out. He also considered Patronicity but didn't think it had a broad audience appeal. He went with Indiegogo because it had a large brand following and rules that allowed him to keep whatever he raised.

"It was well-known enough that I didn't have to spend time explaining the platform," Roginson says. He adds, "the financial part (keeping the money he raised) was really the rationale behind (the decision to use Indiegogo)."

He adds that executing a successful crowdfunding campaign and product/project launch is almost like establishing stock IPO. It is essentially raising money from friends and family through a digital format. Yes, there is the potential of reaching a wider audience through online crowdfunding, but its still the people closest to the funder that end up financing the lion's share of most campaigns. 

Roginson adds that raising money from outside that circle is getting harder for businesses. Non-profits and social entrepreneurs with good stories and clear goals will be able to raise more money from strangers because younger people are adopting different ways of giving to things they care about. He adds that seems less and less of a likely strategy for traditional companies.

"The overall enthusiasm for crowdfunding, especially for for-profit businesses, is starting to wane," Roginson says. "There was a certain amount of novelty around using crowdfunding to start a business two years ago. That novelty doesn't exist anymore."

- Jon Zemke is the Innovation & Jobs News Editor for Metromode, and its sister publications Model D and Concentrate. He is also the Managing Editor for SEMichiganStartup.com.
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