Finance your Startup in the Community

Finding funding for your start-up may be easier within your own community. Your ‘community’ could be in terms of relationships, geography, field of interest or affiliation.

Community funded business is not a generally accepted term. However, there are an increasing number of ways that businesses receive financial support within a community. Some are very traditional, like cooperatives that started in the 19th century and new ones are springing up all the time. An example is crowdfunding, which emerged very recently from the phenomenon of social networks.

The impulse comes from two directions. The first is disaffection with Wall Street and all that ‘big banking’ stands for. The other is the burgeoning ‘local’ movement, the natural offspring of environmentalism.

Keeping funding in your own community has advantages and disadvantages. Some of the advantages are that you know the people who provide money and your business is ‘visible’ to them. Banks have a very bureaucratic approach and lending decisions have to be ‘crossed the line’ to a corporate office elsewhere. With community finance, your access to lenders is easy and, in most cases, it will be face to face. The downsides include the flip side of that coin: you’ll have nowhere to ‘hide’. I always tell commercial borrowers to ‘overcommunicate’ with their bankers. If you borrow from those you know, the time spent communicating with them is likely to take up a lot of energy (and emotion).

Family and friends (some say too, fools)

For many generations, new businesses have looked to family and friends for financing, either equity or loans. This often extends to customers and vendors as well. According to the Angel Capital Education Foundation, startups raise $60 billion annually through friends and family. Therefore, it is probably the largest single source of ‘series A’ funding there is.

There are some strong caveats to this route, as emotion and relationships come to the fore. You will be focused on getting the money, but you also need to get their point of view. Treat them like a business and give them a good reason to help. Be clear about how you will pay them, and use a promissory note to keep it legal.

Have a backup plan. If it is necessary to claim a family member’s loan for reasons such as the lender losing their job, you must be able to pay it off quickly or risk a family dispute. Ask yourself if it’s the right course in the first place, and keep in mind that it’s hard to price and structure the right deal for both parties. Think about what things will be like if your startup fails. Controlling downside risks is often the key to a successful start-up.

Community funded business

Community Supported Agriculture (CSA) is now a widespread means of providing small-scale financial support to farmers. Typically, members of a community buy shares in farm produce in advance of the season and receive delivery when particular crops or meat are available. The process has now spread to other sectors of the economy, mainly agriculture and food. There are examples in seafood (Port Clyde, ME) and restaurants where customers invest and get paid in meals and other benefits over time.

This tends to be a very effective, but somewhat risky way of raising funds for the investor. I lost several hundred dollars, maintaining a small bookstore in my town, where my initial money had to be repaid in books monthly with a small amount of interest. The business model was not prepared carefully enough and the start-up was poorly managed and resulted in failure.

Interestingly, about two years later, in the space next door, another community-supported business opened: a restaurant. These founders not only sell stock to local supporters, but they themselves buy produce from local CSA farms. In addition to the CSA model, there are many other ways to pre-fund product sales through subscription or ‘shares’.

cooperatives

They are much more widespread than you imagine, both locally and nationally. There are nearly 30,000 of them in the United States. I used to serve on the board of directors for the Brattleboro Food Coop, a two-store retailer in my local Vermont town. We had reached capacity at our flagship store with a billing of $16 million and decided to build a brand new store at a cost of several million. Local cooperative members advanced more than $1 million in 3- and 5-year loans as part of the capital stock to support the bank and other financing. In addition, another local cooperative partnered on the building, Coop Power, providing the solar roof.

A significant proportion of cooperatives are small and locally oriented. Many are between farmers and banks. Savings and Loan Associations are, in effect, cooperatives. Some started small and local, but have grown into large entities, on the strength of local support. One example is Land o’ Lakes, now virtually a national dairy brand.

Direct Public Offeryes

A direct public offering is a way for a company to “go public” without the middlemen who orchestrate an initial public offering. A company completes the required offering documents and securities filings, allowing them to sell shares directly to the public: the company’s customers and community.

A recent example of a DPO is Quimper Mercantile in Port Townsend, WA, which has raised over $500,000 in a DPO to open a general store. They were assisted by Cutting Edge Capital. Another of CEC’s clients is People’s Community Market, whose grassroots investment model allows Californians of all economic levels to become founders and shareholders in the creation of a grocery store in West Oakland.

fundraising

Surely you have heard of Kickstarter. An MBA student of mine raised over $15,000 (with a $10,000 goal) in local seed money for Raleigh City Farm in North Carolina through a Kickstarter campaign. Well, the movement is much more widespread and often local in orientation. You can take a look at my crowdfunding page for more information.

The JOBS Act, which goes into effect this year, allows anyone to invest up to $10,000 a year, or up to 10 percent of their net income if they earn less than $100,000 a year, in private companies. This is in contrast to the present, as crowdfunders are largely rewarded in non-financial ways. One of the first platforms on the block will be Earlyshares, an equity-based crowdfunding platform.

Revenue-Based Financing and Customer Financing

Another new approach to business financing is revenue-based financing. The idea is that instead of the risk being associated with the growth of the principal of the investment, the lender assumes a risk on the income, charging a percentage of the top line. An American company called RevenueLoan now offers a financing product based on income, but in relatively large amounts for startups. As they say, “Revenue Based Financing (RBF) is a hybrid financing method that fills a need in the growth capital market for companies with approximately $1 to $10 million in revenue and a proven plan for growth.

Maker Community

The maker subculture often enjoys engineering-oriented pursuits such as electronics, robotics, 3D printing, 2D plotter cutting, waterjet cutting, and CNC tooling (even applied to embroidery), among others. others. traditional activities such as metallurgy, carpentry and traditional arts and crafts.

The entire print-on-demand industry is another example, where authors can produce books even one at a time. While these are not funders, they do reduce costs that would otherwise be associated with small-scale manufacturing. However, there are hybrids that combine manufacturer facilities with initial seed funding, as well as hatchery space in factory-like settings.

Accelerators and Business Incubators

Unlike many business assistance programs, business incubators do not serve every single business. Entrepreneurs wishing to enter a business incubation program must apply for admission. They are also often physical places where you can start your business under a collective roof. Many incubators/accelerators are competitive to join, but once inside, seed capital is provided.

While it is possible to generalize about accelerators, there are almost as many variations as there are similarities. Business Accelerators can focus on very specific geographies (like cities or states), industry sectors (like information technology or clean energy), industrial processes (like manufacturing or industrial kitchens). Accelerators can offer short to medium term physical space, networking, mentoring, funding or introduction to funding, training, peer group support. These may vary over time, for example: pre-launch, startup, early stage.

Other Community Funding Opportunities

There are many other community or ‘local’ financial opportunities. There may be financial incentives, such as grants available from local government agencies, or business plan competitions run by local development agencies and academic institutions, for example.

Depending on your startup’s governance structure, there may be program funds that can be accessed. For example, in those states where the L3C (Limited Liability Company Limiting Profit Level) form exists, you may be able to get funding from the foundation.

There are also combinations of some of the different community funding avenues to explore. For example, you could use crowdfunding to extend the route of family and friends. You could add other people into your network, and by having a larger lender base, each contributor’s risk could be reduced as they would be providing smaller sums. The downside to the hybrid would be the time it would take to commit to keeping lenders informed of progress.

How can you do it?

Brainstorm with friends and associates, but do it in an organized way. You probably have fixed ideas about how you are going to raise money for your start-up and generating new ideas will be important. Individually, one of the methods I use is mind mapping (there are several free programs and apps on the web); It allows me to briefly write down all my scattered ideas in a visual space. It helps me see the forest for the trees.

Affinity diagrams might be something you can use in a group. It sounds daunting, but all you need is wall space and sticky notes. Participants work on their own ideas and post them. When you have them all up on the wall, you can start to see which ideas are related, or which ones can spark new ideas.

Be as wild as you can about where you can get capital or loans. You’d be surprised how many sources there are and how many people would be happy to help.