Your local community may be the best place to find financing for your startup. You could define your ‘community’ in terms of people, geography, fields of interest, affiliation, or other factors.
The term community-financed business is not widely accepted. There are many ways businesses can be financially supported in a community. Some of these are more traditional than others, like coops that were founded in the nineteenth century. But newer ones are constantly emerging. One example of crowdfunding is the recent social networking phenomenon.
Two directions are driving the momentum. The first is disillusionment with Wall Street and all that it represents. The second is the burgeoning “local” movement, which is the natural offspring from environmentalism.
There are advantages and disadvantages to keeping funding local. There are some advantages to keeping funding in your own community. For example, you will know the people who provide the money and your company is visible to them. The banking system is very bureaucratic and all lending decisions must be passed to another corporate office. Access to community finance is simple and will most likely be face-toface. Minuses are the reverse side of that coin. You will have no place to hide. Business borrowers should ‘over-communicate with’ their bankers, I tell them. You can borrow from people you know and it will take up a lot of your time (and emotions) to communicate with them.
Family and friends (some even call them Fools).
Since the beginning, entrepreneurs have turned to family and friends for financial help, loan or equity. Customers and suppliers often receive this same financing. According to the Angel Capital Education Foundation startups raise $60 billion annually through family and friends. It’s the largest single source of funding for’series A’ startups.
This route has its limitations, as emotions and relationships play a major role. While you will be focusing on the money, it is important to understand their perspective. You should treat them like a business, and give them a reason to help. To make it legal, be clear about your repayment plans and use a promissory letter.
Always have a backup plan. You should have a backup plan in case a loan from a relative needs to be called in due to reasons such as the lender losing a job. It’s important to ask yourself whether this is the right course of action. Also, it can be difficult to price and structure the right deal. Consider what the consequences will be for your startup if it goes bankrupt. A key ingredient to a successful startup is to be aware of the downside risks.
Community Supported Agriculture is a popular way to provide small-scale financial assistance to farmers. Members of a community purchase shares in farms’ produce in advance and then receive the products as they become available. This practice has spread to other areas of the economy, including ag and food. Examples of this are in seafood (Port Clyde ME) and restaurants, where patrons can invest and receive meals and other perks over the course of time.
This is a great way to raise funds, but it can be risky. My up-front money was to be repaid monthly in books with a small interest. I lost hundreds of dollars by supporting a small village bookshop. The startup failed because the business model was not well-planned and managed poorly.
Two years later, a second community-supported business opened in the same space. It was a restaurant. These founders sold shares to local supporters and also bought produce from local CSA farms. Other than the CSA model, there are other options.
They are more common than you might think, both locally as well as nationally. Nearly 30,000 of these are found in the US. My local Vermont town has a Brattleboro Food Cooop. I was a board member of that two-store supermarket. With a $16million turnover, we had reached our capacity at the main store and decided to open a new store. It was a costly decision that would have a significant impact on our bottom line. Coop members from the area contributed well over $1million in loans on 3 and 5 years as part of the shareholder equity. This was used to finance the bank and other financing. Coop Power, a local cooperative, also participated in the construction of the solar roof.
Many coops are small-scale and local-oriented. Many are located among farmers and banks. Savings and Loan Associations can be described as coops. Many started small and were local, but with local support they have grown to be large organizations. Land o’ lakes, a well-known brand for dairy products, is an example.
Direct Public Offerings
Direct public offerings allow companies to “go public” directly without the need for intermediaries. The company must file the required securities filings and documents, which allows them to directly sell shares to the public, their customers and the community.
Quimper Mercantile, Port Townsend WA, is a recent example of a DPO. They have raised more than $500,000 to fund a DPO to open a general shop. Cutting Edge Capital provided financial assistance. People’s Community Market is another client of CEC. This model of grassroots investment allows Californians from all economic backgrounds to become Shareholders and Founders in the creation of a West Oakland food store.
Kickstarter is a term you will have heard of. A Kickstarter campaign helped a student of my MBA raise over $15,000 seed money for Raleigh City Farm, North Carolina (with a $10,000 target). The movement is more widespread and often localized. For more information, take a look to my crowdfunding page.
The JOBS Act, which will be in force this year allows anyone to invest up $10,000 a YEAR or 10 percent of their annual net income if they make less than $100,000 a Year, in private companies. Crowdfunders receive a lot of non-financially rewarded rewards, which is a stark contrast to the current situation. Earlyshares will be the first platform to go live, a crowdfunding platform that is equity-based.
Revenue-based Financing & Customer Financing
Revenue-Based Funding is another way to fund businesses. Instead of taking on risk for capital growth, the lender will take on risk for revenue by charging a percentage. RevenueLoan, a US company, now offers Revenue-Based Financing. However, it is limited to startups and only on large amounts. Revenue Based Financing (RBF), a hybrid financing option, is available to companies with revenue between $1 and $10 million and a plan for growth.
The maker subculture is known for its interest in engineering-oriented pursuits like electronics, robotics and 3-D printing. They also enjoy 2-D plotter and water-jet cutting.
Another example is the entire print-on-demand market, which allows authors to produce books individually. These are not funders but they lower the cost of small-scale manufacturing. There are hybrids, which combine maker facilities with startup funding. They also offer incubation space in factory-like environments.
Incubators and Business Accelerators
Business incubators are not like other business assistance programs. They do not provide services to all companies. To be admitted to a business incubator program, entrepreneurs must apply. These programs are often physical locations where you can open your own business. Many incubators/accelerators are competitive to join, but once in seed capital is provided.
Although it’s possible to make generalizations about accelerators, there are as many variations as similarities. Business accelerators may be focused on specific geographies, such as States or cities, or industries (such information technology or clean energies), or industrial processes (such manufacturing or industrial kitchens). Accelerators may offer space for short and medium term, as well as mentoring, funding or introductions to funding, training, peer support, and networking. These can vary in terms of time, such as pre-launch, startup or early stage.
Other community finance opportunities
There are many other local or community-based financing opportunities. For example, grants from local governments or competitions for business plans run by academic institutions and local development agencies may offer financial incentives.
Program funds may be available depending on the structure of your startup. Foundation funding could be available in certain states, such as those that have the L3C (limited liability company that caps the amount of profit), for example.
You can also combine some of the various community funding avenues. You could also use crowdfunding to help your family and friends. By having more lenders, the risk of each contributor could be lower as they would be contributing smaller amounts. However, the downside to the hybrid is the commitment to keep lenders informed about progress.
What can you do?
Think with your friends and colleagues, but be organized. It is likely that you have some ideas in mind about how to raise capital for your startup. However, it is important to generate new ideas. Mind-mapping is a method I use on a single basis. It allows me to quickly note all of my scattered ideas in one visual space. It allows me to see the forest for the trees.
You might find affinity diagrams useful in groups. Although it sounds intimidating, all you need to do is create some wall space and stick-notes. Participants create their ideas and then post them. Once you have all your ideas posted on the wall, you can start to see which ideas are related or which might generate new ideas.
You should be as creative as possible about where capital and loans can come from. It’s amazing how many resources there are and how many people would love your help.
William Keyser is a veteran entrepreneur and the Managing Director at Venture Founders LLC:How to Start a Business. Startup Owl provides free advice and information to early-stage entrepreneurs.
Will is a veteran entrepreneur who has VC experience. He is dedicated to helping business startups clarify their business purpose, improve their business plan, speed their market entry, offer customer value and finance their business.