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Corner Store Pledge Drive: Small Businesses Look To Crowdfunding

Corner Store Pledge Drive: Small Businesses Look To Crowdfunding

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Published by: Crowdsourcing.org on Jul 27, 2012
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02/03/2013

Corner Store Pledge Drive: Small Businesses Look To Crowdfunding

By: Kim Velsey, 7/11

When Aaron Hillis and his wife bought Cobble Hill’s Video Free Brooklyn—a wellloved but somewhat dingy relic from the age of VHS— they had rather lofty plans for the store. They would transform the outmoded space into hub of film culture that would redefine the role of the video store in the time of Netflix. It would be both a boutique offering personalized service and an event space (thanks to collapsible shelves) with screenings and discussions. But like many fledgling entrepreneurs, their plans far outpaced their pocketbooks—Mr. Hillis figured he would need about $50,000 to revamp the space. They might have tried for a bank loan, or made do until they saved enough for the renovation, but neither option was very appealing, so the Hillises did what everyone with a creative vision and a lack of cash seems to do these days: they launched a crowdfunding campaign.

“I don’t think it’s any different or less valid than when PBS or NPR ask people to donate for a free tote bag, or the Kickstarter campaign in Detroit to build a life-size statue of RoboCop,” said Mr. Hillis, who has thus far raised about $7,000 (with two weeks to go on a $50,000 campaign) on Indiegogo. “As long as you’re transparent about where the money is going, you’re putting together something that people want to be a part of.” Although it might seem counterintuitive—aren’t businesses supposed to get their money by selling things?—crowdfunding has become increasingly popular among entrepreneurs. Using online platforms like Indiegogo, Smallknot and Lucky Ant, businesses have raised money to cover everything from startup costs and special projects to operating expenses. For the business owner, the appeal is obvious: loans are hard to come by, while online fundraising provides access to what is essentially interest-free (and sometimes entirely free) capital, depending on the perks and inkind services they offer in exchange—which run the gamut from being worth as much as the contribution to a thank you card. In a place like New York, where hyper-gentrification has driven many popular businesses from neighborhoods, it’s clear that momand-pop’s, even popular ones, sometimes require more than patronage to stay afloat. And rather than bemoaning their demise, many people are willing to pay for the luxury of keeping them. “I think that more and more people are recognizing that small businesses are integral to community identity and they’re also an endangered species in many places,” said Jonathan Bowles, the director of the Center for an Urban Future. “I do think that many people are going to be increasingly putting money up to ensure that their favorite small businesses stay viable.”

But what does it mean for the future of for-profits? Are small businesses capitalist enterprises whose success ought to be determined by the free market, or cultural institutions deserving of our protection and coddling? Can they be both? “People want to buy local and be more connected to the businesses around them,” said Slava Rubin, the co-founder of Indiegogo, where small businesses have been crowdfunding since 2008. “It’s emotion and commerce coming together.” Indiegogo is organized around the belief that anyone should be able to raise money for anything, as long as they’re upfront about where the money’s going and what they’re offering in exchange for contributions. Its many successful campaigns prove that people will “fund” or “contribute to”—both Indiegogo and Smallknot insist on using the language of investment and gently but firmly corrected The Observer when we referred to such monies as donations—every endeavor imaginable. From opening a vegan donut shop (Brooklyn’s Dun-Well Doughnuts) to paying for a couple’s in-vitro fertilization (the first crowdfunded baby was born just recently), people can be surprisingly generous. Sure, some are motivated by the perks or in-kind goods and services that most businesses offer in exchange for cash (Video Free is giving away everything from free rentals to a private screening with comedian David Cross), but others seem moved by little more than the spirit of generosity. Dun-Well, for example, offered a coupon for a free doughnut in exchange for a $25 contribution. It was claimed by 58 people. In Mr. Rubin’s view, crowdfunding allows for a shift from a basic transaction to a relationship, which is essentially the same thing as branding.

“Now small businesses get to create campaigns, gauge interest in new concepts and create lasting relationships with their customers,” he said. Sarah and Allon Azulai, a husband and wife team who operate Park Slope coffee shop Kos Kaffe, agree that crowdfunding had been an surprisingly fun way to connect with customers. The couple recently ran a Smallknot campaign that raised $4,500 for an awning to block the direct sunlight that routinely cleared out their coffee shop for several hours every afternoon. “I don’t know if it will change the game for small business, but many small businesses, you’re just making a living,” said Mr. Azuli. “No one is putting away hundreds of thousands of dollars in reserve, so when you need an awning or a new delivery van, you almost always have to go outside to get the money.” Kos Kaffe offered perks—like cards for free drinks in exchange for $10 investments or a coffee of the month club for $75—which made the whole thing more akin to selling goods ahead of time, Mr. Azuli said. Indeed, Smallknot is quite insistent that perks be more than mere tokens. “It’s really important that they’re not out there shaking the cup,” Smallknot co-founder Ben Rossen said. “With patronage of the arts or a creative project, it’s easy to give for the sake of giving, but it’s really not the same when you’re giving to an existing business. I think among a lot of business owners, there’s sort of a perception out there that crowdfunding is kind of magical, this idea that people will give me money just because I’m there.”

And while crowdfunding is an excellent way to test whether a new concept will be popular, it does risk triggering resentment from customers who feel that patronizing a business should be enough. Mr. Hillis said that one customer came into the store recently and asked, “Are you the guy begging for money?” “And while it is the digital equivalent of a handout, I wouldn’t have done it if our linoleum was crappy and we just wanted to replace it,” Mr. Hillis said, adding that he thought it was important that crowdfunding be limited to one-time projects rather than run-of-the mill replacements. “If you’re a coffee shop and your boiler’s busted and you need a new one, well, you’re a business, you make money, why can’t you get that with your revenue?” Mr. Hillis asked. No one wants to seem like a charity case. Yassir Raouli, who operates Bistro Truck with his wife, Elsa Leon, said that he was hesitant when Mr. Rossen, a fan of their food truck, first contacted the couple about using Smallknot to help fund Rustic L.E.S., the brick-and-mortar restaurant they’re opening. “I wasn’t too excited, to be honest. It sounded like we were going to beg for money and I didn’t think it would be good for the brand,” Mr. Raouli said. But he was eventually won over by the platform’s focus on in-kind exchange (and his wife’s enthusiasm). The couple raised $8,000 to buy kitchen equipment, money that came through at a time when things were taking longer than expected and the couple was short on cash. Jonathan Hack, one of the customers who contributed to Mr. Raouli’s campaign, said that he was moved to participate by his love of Bistro Truck’s food.

“The food is also definitely higher quality than a normal lunch I would get during a workweek and costs a whole lot less,” he wrote us in an email. “With Rustic, it is my understanding that they would bring this simple but creative cooking style to a restaurant setting. This is the sort of restaurant that I like to frequent.” Many of the small business owners we talked to were, in fact, more than a little surprised by how many of their contributors were not friends, family, or even regular customers. Last year Aurora Anaya-Cerda opened La Casa Azul, a bookstore in East Harlem specializing in Latino literature and bilingual books for children. She raised almost $40,000 raised through Indiegogo. (A private investor matched the amount.) “Seventy percent were people I didn’t know,” said Ms. Anaya-Cerda, who offered incentives ranging from t-shirts, discounts and autographed books to one’s name on a donor wall. “There were people from East Harlem, but also people from different states, London, South Korea and Australia.” Ms. Anaya-Cerda turned to crowdfunding because banks wouldn’t give her the amount of financing she felt she needed to make a go of it. “I’m now working harder not just for myself, but for everyone,” Ms. Anaya-Cerda said. But is crowdfunding really a solution to a lack of bank loans with reasonable interest rates, or retail rents that force out even beloved independents? Ami Kassar, the CEO and founder of MultiFunding, which advises small businesses on lending options, doesn’t think so. “I’m all in favor of new ways for businesses to access capital,” said Mr. Kassar. “But as a country we shouldn’t be putting all of our eggs in one basket and think we’ve solved the problem. We should be focusing on

getting banks to lend to small business. In my mind, crowdfunding is an experiment that’s nascent and I can’t see it having a big impact.” The looming Securities and Exchange Committee regulations—which offer great promise in that they would allow for equity investing in small businesses—might also prove prohibitively onerous for a lot of momand-pop’s, Mr. Kassar said, possibly requiring them to provide costly audited financial statements to raise any crowdfunding capital at all. “My frustration is that mostly it’s going to help tech startups,” he said. “I can’t personally see it being this magic bombshell. Nothing is as easy as you think it’s going to be.” Even Amy Cortese, the author of Locavesting: The Revolution in Local Investing and How to Profit From It and a big booster of the practice, thinks that until crowdfunding can offer equity stakes and investment returns, its potential will be limited. Social returns are great, sure—Ms. Cortese noted that she’d contributed $40 to La Casa Azul bookstore even though she lives in Brooklyn and doesn’t know the owner—but she wouldn’t spend her savings on a small business unless she expected the money to earn a decent interest rate of 5 or 10 percent. “If we really want to shift money from big, bad Wall Street companies to ones that we care about, people will need a return on investment,” said Ms. Cortese. “You can’t retire on a film credit or a t-shirt.”

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