New site helps small businesses crowdsource capital from their communities

By Anneke Jong

Stanford Graduate School of Business classmates create Profounder, an online crowdsourcing tool that helps entrepreneurs raise money online from their friends and family.

(CBS News/ What's Trending) Part of the mission of What's Trending is to bring you to the source of what will be trending in the years to come.

"Summit at Sea" was an invitation-only conference held from April 8 -11, 2011 for entrepreneurs who wanted to share their new ideas with other likeminded individuals. These "Summit Series" meetings have introduced the world to some of most innovative thinkers of today. Founder of Philanthro Productions Anneke Jong was on the cruise with the "Summit at Sea" attendees and discussed their forward-thinking businesses that they hope will change the way we live.

After founding Kiva, an innovative microlending website that helped individuals to invest in entrepreneurs in developing countries, Jessica Jackley turned her sights to supporting innovators back home.

With her Stanford Graduate School of Business classmate Dana Mauriello, Jackley co-founded Profounder, an online crowdfunding platform that gives entrepreneurs the tools to raise investment capital from members of their communities. Instead of just raising capital the usual way, the two introduced Profounder at the DC10 Summit Series in 2010 at a live pitch event and won $50,000 for their idea. Now, they're spreading word about their business -- and helping others -- by sponsoring a live pitch event for up-and-coming businesses at Summit at Sea.

What's Trending: Can you tell me more about your experience with the live pitch event last year?

Mauriello: We had the opportunity to pitch the business idea for Profounder for five minutes to all the attendees (of the DC10 Summit Series), who then got to do some live trading of fantasy stocks for all the businesses being presented. Second Market created an app that enabled everyone in the audience to do live trading of fantasy stocks from their phones. At the end, the business with the highest value stock won $50,000 from the Summit Series team and Presumed Abundance.

Many of the people involved in that experience are now really integral parts of our business. Barry Silbert from Second Market is an investor. Kim [Scheinberg] and Rafe [Furst] from Presumed Abundance are also deeply involved in our business, and we're so thankful for that. It really all gelled around the same time.

Jackley: It was pretty wonderful. I wanted to add that of the $50,000 we got, $10,000 was used today to pay it forward with another pitch event which we hosted. Our goal would be that next year we continue to have a pool of money that is paid forward through the investments that Profounder has made as a company in Summit businesses.

WT: Can you guys talk about paying it forward and, what you did today with this live pitch event?

Mauriello: During this pitch event we wanted to make it more than about just money. We also made it about crowd-sourcing a number of resources from the audience so everyone could participate and get involved, and a variety of different businesses in different stages could also be involved.

Six entrepreneurs got to pitch their business for five minutes, and then we asked for three things: what someone could do to advocate for them, what someone could do to lend their skills and services and how people could actually invest. After all the pitches were done, we had boards up on the wall for each of the six businesses. We had color-coded post-it notes for each category of contribution, and we tallied who had the most support. The winner received $7,500, that was the innovative new URL shortener called bre.ad, and $2,500 went to the runner up, Sole Bicycles.

WT: How did you identify the entrepreneurs who pitched today?

Jackley: What's nice is that it [Summit Series] is a supportive community. There's not really competitiveness as much as there's a mutual desire to see each other succeed... Even more than volunteers, we had recommendations. People would suggest someone else and say, "You should really talk to so-and-so, they're awesome and their product is amazing."

Mauriello: Our whole motivation for doing the event wasn't just about the money. Last year, we saw that you just get so excited about each other's businesses, but it can be hard to find opportunities to get involved in a tangible way. You noticed last year there were auctions and other ways to get involved and raise money for the non-profits, but for the for-profit ideas, there wasn't really that tool for engagement. This is our first iteration of that, which we hope continues.

WT: Profounder is founded on the principle of crowd-sourcing support for new ventures. What do you guys see as the future of that space? How are you hoping to shape it and what's next for Profounder?

Jackley: The statistics are so ridiculous and extreme; I almost start laughing when I say them. 99.9% of all businesses in this country are technically categorized as small businesses. Who's thinking about them, who's serving them? This market is so underserved. Eighty-seven percent of funding to private companies in the U.S. comes from friends and family -- not VCs, not angels, not bank loans -- it's offline, it's scrappy, it's haphazard, it makes Thanksgiving awkward... There aren't good tools to make it any kind of a standardized process. Not only is it offline, but they don't know what to comply with and which papers to file.

So, we decided to put this online and start with the people closest to you in concentric circles to do community-based crowd-funding, different than a wide-open, come-one-come-all marketplace. There's is a huge opportunity to start small and slowly build out. We're trying to provide entrepreneurs with the rules, the laws, and the best technolog, so people can slowly figure out how to fundraise not just through the obvious social networks, but beyond.

WT: At today's live pitch event, you included opportunities for people to invest money, but also to offer their skills, their support and their advocacy. It sounds like you guys want to build that into the functionality of Profounder to not only fundraise, but also to provide connections and support.

Mauriello: We wanted to start with the deepest need where we felt like the least innovation was currently happening, and that was definitely friends and family fundraising. It hadn't been innovated at all since the church collection basket. We wanted to start there and then partner with others in the space who are doing amazing things to provide this whole basket.

But, more and more we see that it isn't just money that is going to make it or break it. Money helps, but they may also need great marketing advice or just having people shop at your place more often can been tremendously valuable. So that's a next step for us.

Former strategy consultant by day and social entrepreneur by night, Anneke Jong is a student at the Stanford Graduate School of Business and a founding partner of Philanthro Productions. She writes and speaks about technology, design, storytelling, and the future of philanthropy. Twitter: @annekejong , Blog: www.annekejong.com.

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Crowdfunding: Business startups use tactic as alternative to investors

By: Marino Eccher, INFORUM

For three years, Minneapolis-based comic publisher Raighne Hogan paid to produce his company’s annual anthology of comics by local artists – the Good Minnesotan – out of his own pocket. That was getting pricey. So when it came time this year to put out the Good Minnesotan 4, Hogan tried a different tactic: passing around a digital collection plate to seek support from the public.

What is crowdfunding?
Crowdfunding is the latest trend for artists, startups and small businesses: raising money from the public via online pledge drives, a few dollars at a time. A handful of regional projects have used the tactic to jump-start their efforts, and one Fargo company is banking on it to launch a brewery.

For three years, Minneapolis-based comic publisher Raighne Hogan paid to produce his company’s annual anthology of comics by local artists – the Good Minnesotan – out of his own pocket.

That was getting pricey. So when it came time this year to put out the Good Minnesotan 4, Hogan tried a different tactic: passing around a digital collection plate to seek support from the public. It’s a tactic known as crowdfunding, and it has taken root among a handful of regional business projects in recent years.

Those range from small artistic ventures like Hogan’s, which sought and raised $1,000 over the summer from online backers, to ambitious business ideas like the Fargo Brewing Company, which will seek $55,000 in early 2011 to start what would be the state’s only homegrown brewery. They dangle perks, swag and goodwill to coax contributions out of friends, family and strangers in amounts ranging from $1 to $10,000-plus.

Crowdfunded projects are powered by websites that feature a wide range of projects for public consideration. Hogan used New York-based Kickstarter, which features a handful of other Minnesota projects, while the Fargo Brewing Company is using Los Angeles-based ProFounder.

The specifics vary from site to site, but the basic model stays the same: Users post a project with a funding goal and a time limit, typically a month, and solicit pledges from backers with a short pitch. Many Kickstarter projects also include videos. If the goal is met on time, the pledges are locked in and the site takes a few percentage points of the money raised as a fee. If not, no money changes hands.

To call such sites investment vehicles would be a misnomer: Backers don’t own a piece of the projects they support or turn a profit (indeed, any such arrangements would entangle the sites in considerable regulatory oversight). Support a successful ProFounder project, and you’ll do no better than break even; support a Kickstarter project, and you won’t get your money back at all.

To bring in backers without the prospect of financial gain, crowdfunding projects usually turn to creative incentives. A $500 Kickstarter donation to a Minnesota Fringe Festival play might get you dinner with the actors. A $100 investment in the Fargo Brewing Company will get you a company T-shirt; $1,000 will get you on the guest list of exclusive company events, including tastings.

Dana Mauriello, president and co-founder of ProFounder, said getting that kind of reward for investing in a company “is almost like being a member of a cool club.”

In ProFounder’s case, there’s also a philanthropic incentive to give. Backers are repaid with a percentage of the company’s revenue over a set number of years. Once they recoup their investment, any revenue that would have gone toward repaying them goes instead to a nonprofit of the company’s choosing for the duration of the agreement.

“You believe in the person, you believe in the business, you believe in the business mission, you just want to see this business exist in the world,” Mauriello said.

But getting a crowdfunded project to catch on amid a sea of other offerings isn’t easy. ProFounder, which launched in December, has dozens of projects, while Kickstarter has hundreds. Hogan said standing out on Kickstarter meant working aggressively to start his project. He started a blog and “bothered friends and family” throughout the process.

“A lot of it was just trying to create some noise on the Web,” he said.

It doesn’t always work. Rip Smith, a West Virginia-based photographer, tried to raise $3,500 via Kickstarter this summer for a photography project to document abandoned places in rural North Dakota. He secured just $432 in pledges.

Smith said he thinks his fundraising goal was too ambitious. He also said he never seemed to garner much momentum on Kickstarter – he was never highlighted on the home page or chosen as the featured project of the week.

“If I had to guess, success in that medium requires either someone who already has a large constituency to whom to appeal, or the project needs to capture people’s imagination in some way,” he said. Smith said he did the North Dakota project anyway, and might try crowdfunding again for future projects.

Jared Hardy, one of the partners in the Fargo Brewing Company, said the importance of building an engaged audience is one of the reasons the company decided to launch next year rather than this month. He said the brewery wanted to make sure it was on the radar before starting the clock on its lofty fundraising goal.

“We wanted to give them a little more notice ahead of time,” he said. The company is also seeking about $150,000 through a private round of investing – another area in which ProFounder will help start-ups navigate regulatory challenges.

The brewery is dangling a unique prize for high-rolling backers: Give $10,000 or more, and they’ll create a themed seasonal brew in your honor. But the real payoff, he says, is getting a beer company up and running.

“You actually get to help start it and be a part of that,” he said. “We think that’s pretty cool.”

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HOW TO: Crowdsource Funds for Causes, Creativity and Startups

Selling candy bars or applying for a bank loan is so 20th century. Now, there are more ways than ever to raise money thanks the to Internet. A huge market of do-it-yourself crowdsourcing websites has made fundraising easier and more effective.

The good news is that you don’t have to be a techie to access all of these great resources. Even the most adamant technophobe can get online and start raising money. Below, we profile some of the most useful ways to raise money for your charity or creative project.

If celebrities don’t have to bake brownies or stand outside of grocery stores, why should the rest of us? That’s precisely why Edward Norton and Shauna Robertson started Crowdrise, a personal foundation platform that allows users to raise money and organize volunteer efforts.

Each Crowdrise template gives everyday philanthropists a hub to showcase their charity, do social media outreach, display photos, and update contributors on the project’s progress. Crowdrise also features a recurring payment system, team pages (good for marathons), and personalized URLS. To incentivize active membership, Crowdrise gives away prizes to the most active members.

Crowdrise still keeps a sense of humor. It’s tagline is “If you don’t give back, no one will like you,” and the website is peppered with chuckles, such as Will Farrell holding a bottle of “Sexy Tan” sun screen. Norton explained at last the recent Mashable Media Summit that this was a deliberate attempt to move beyond the dry and utilitarian modes of traditional fundraising.

Crowdrise has other, star-studded alternatives. Citizen Effect, another celebrity-endorsed crowdsourcing fundraiser focuses on a few select charities. DonorsChoose.org is built for K-12 educators, and recently experimented with group-buying innovator Groupon. Honorable mentions go to GiveForward.org, givezooks and SocialWish.com.
Creativity

Kickstarter specializes in helping aspiring creatives fund small scale projects, usually between $500 – $20,000. To incentivize contributions, each project offers a tiered reward system. For example, $20 donated to an indie movie may get a donor an autographed copy of the movie. $5,000 could get that donor listed in the opening credits as an “executive producer.”

Kickstarter campaigns can be a fascinating mix of online savvy and old-fashioned door-to-door salesmanship. Take Jesse Genet, a 22-year-old Southern Californian with an industrial manufacturing degree and the hope that she could revolutionize the fashion printing business. To raise over $12,000, Genet offered deep discounts on chic wallets and purses to Kickstarter contributors and promoted her wares at popular meetups for LA locals. Genet almost missed her financial goal but, through a flurry of frantic Facebook status updates, barely pushed herself over the top.

Kickstarter is currently in beta, and is screening all proposals.

Kickstarter alternatives include, IndieGoGo and Invested.in. Pledge Music and Sellaband are similar services for musicians, and Spot.us is for investigative journalists.

Given the entrepreneurial spirit of the web, crowdfunding websites for startups should be everywhere. However, equity is generally heavily regulated by federal governments and can include everything from disclosure requirements to minimum wealth for investors. Additionally, each country has its own regulatory laws, further complicating the issue. In response, entrepreneurial crowdfunders have started to look outside the box.

In order to entice serious investors, crowdfunding website GrowVC created a social networking platform for investors and entrepreneurs to find and communicate with one another. For those who want invest more than the $1,200 limit of their particular community fund, GrowVC encourages members to conduct negotiations outside their website. GrowVC receives no money from investments made or facilitated outside of the community fund.

“Generally, unless you were friends with the founders [of websites such as Google (Google) of Facebook], or a wealthy sophisticated investor networked in the VC community, those opportunities would never be made available to you — GrowVC changes that, all you need to do is be there,” wrote CINTEP director, Nick Christy, in an e-mail. His company has taken full advantage of online crowdsourcing opportunities.

Additionally, GrowVC founder Valto Loikannen maintains that the community fund acts as a kind of spotlight for successful companies. “The community fund acts as an ‘activator’ for bigger investments, similar to the ‘Like’ function in blogs,” Loikannen wrote.

Profounder offers another option for startup crowdfunding. While the site hasn’t officially been launched, clients will be able to submit pitches, invite friends, conduct transactions online, and manage their investor community online (including repayments, rewards, and regular updates). Founded by Kiva co-founder
Jessica Jackley, and with a strong suite of advisers, such as LinkedIn (LinkedIn) chairman Reid Hoffman and Prosper CEO Chris Larsen, it looks like Profounder is set to take on the startup crowdfunding market sometime this fall.
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