Here’s what crowdfunding looked like in 1885 . . .
Newspaperman Joseph Pulitzer wanted the Statue of Liberty done. So he asked readers of the New York World to donate to a “pedestal fund.” The campaign raised $101,091 – about the equivalent of $2.5 million in today’s dollars – from 160,000 donors.
In its simplest form, crowdfunding means getting smaller amounts of money from a large group of people. The strategy is retooling American businesses, but why?
Cut to the perfect storm that brought small business to its knees: the recession of 2008-09. Increased regulatory requirements and failing community banks caused bank loans to disappear. Access to capital went from a healthy surge to a trickle, stifling growth for both start-ups and established businesses.
Attorney Anthony Zeoli wouldn’t take it sitting down. He spent six months writing the Illinois Intrastate Crowdfunding Bill (HB 3429). It was one of the few pieces of Illinois legislation that passed the House and Senate and was signed by the governor. Impressive, to say the least.
The following is a conversation with Mr. Zeoli, a young yet seasoned attorney who believes like Pulitzer himself did that people should invest in their community. His passion for the bill, along with the support of the Small Business Advocacy Council of Illinois, continues as crowdfunding gains momentum. We also talked to Elliot Richardson, CEO of the SBAC. This non-partisan organization rallies for small business causes right here in Illinois.
Crowdfunding thought leader and advocate Kathleen Minogue describes crowdfunding as: human beings connected and empowered by technology to share their social, creative and financial capital. What do you think of that definition?
TONY: I think that’s a very good definition. Crowdfunding is not actually new. In fact, it’s very, very old. We’ve just turned to using the internet to crowdfund now because of changes in security laws at the federal level and Illinois State levels. Not only can we give to these companies, but we can invest and be part of these companies. That’s even better because it allows the people who invest money to grow their money and then give even more back.
What’s the status of intrastate crowdfunding today?
TONY: On average, crowdfunding gives about a seven to 12 percent return. Most people don’t have access to that – coupled with the opportunity to invest local and really do something with their money.
So it’s benefitting communities. We have one project coming up that is specifically designed to benefit low income communities. It’s a housing developer who’s going to employ people from that area, do apprenticeships and keep more of that money in that area.
So there’s a lot more to it than just giving to it because you like the cause. There is a profit component to it, but you don’t do it strictly because of that. You do it because you like what they’re doing. That’s why there is so much money going into Kickstarter and Indiegogo where there’s no ability to profit. You’re just so excited about that cause and what they’re doing that you want to help move it. Now we want to couple that so that if they are successful, they can continue to give and find more of those ideas.
Any examples from Kickstarter and Indiegogo that could have been great intrastate crowdfunding sensations?
TONY: You look at Oculus which was funded with three or four or five million on Indiegogo. I can’t remember exactly how much they raised, but a few months after the crowdfunding campaign closed, the company got bought out by Facebook for billions, and the people who put money into Indiegogo got T-shirts or products or whatever, but they did not get equity so they didn’t make any money.
They could have had a ton. Somebody quoted that $100 invested would have made $40,000. Not sure how accurate that is but it certainly would have been an astronomical return. Obviously that’s the lottery jackpot of scenarios, but you have other scenarios like the Million Dollar Shave Club, which isn’t a revolutionary technology. At its heart it’s a normal business model trying to make things different, and they raised $1.5 million or so before crowdfunding from friends and family and all that other stuff and they got bought out five or six years later for a billion dollars. That’s the exact type of company that might potentially be raising money through crowdfunding because they can’t find that kind of bridge financing between their friends and family and the Series A round.
What is the most unusual company that has been funded this way?
TONY: It runs the gamut – All types of companies are using crowdfunding including tech companies, manufacturers, breweries, local restaurants, and even marijuana manufacturers. I’ve even been approached to fund a professional sports team.
How is this going to change our communities?
ELLIOT: My hope is it will allow non-accredited investors to invest small sums of money into the businesses they believe in. It will allow people who cannot get financing or secure capital from angels or venture funds, or who prefer to raise money from the crowd, to raise up to a million – and 4 million with audited financials, for their businesses.
How does intrastate crowdfunding impact the business ecosystem?
ELLIOT: Intrastate equity crowdfunding is a way for small business owners and local entrepreneurs to invest in one another and to, in some ways, empower each other. That’s what is really compelling about this. As long as it’s not too difficult logistically, intrastate equity crowdfunding can do tremendous good for local communities. It will put money in local economies and that means more resources for communities to grow and create jobs. The person making a good living, but not enough to be an accredited investor, will be able to put a thousand dollars in their favorite brewery, clothing store or pizza place. A great thing about intrastate crowdfunding is that investors will become loyal fans.
Will intrastate crowdfunding create jobs?
TONY: There were some rough kinds of calculations done about two and a half years ago. At that time I believe they found that for every $150,000 raised it created just under or just over two jobs.
Is crowdfunding the future of real estate?
TONY: It is absolutely the future of real estate investment. There’s no doubt to that at all and anyone that says otherwise just doesn’t know what real estate crowdfunding is.
If you think about it, we walk past how many developments per day – houses that go up and businesses that go up. That’s why there’s so many flipping shows and all that stuff, but people don’t have that expertise or capital to do the projects themselves. Crowdfunding allows people to get a little piece of those same developments that they see and for a much smaller portion. They can still participate in the profits; they can still feel like they were part of a building that went up. The reason why crowdfunding has been so popular is because it’s just the easiest of all of the investment types for people to understand.
Do small businesses understand crowdfunding?
ELLIOT: We need to talk much more about it. The SBAC is educating business owners and local communities about the benefits of intrastate crowdfunding and we will be doing it on a larger scale in 2017. It’s out there as a resource. It’s going to take time and a lot of education, but there is a real desire for business owners to grow and expand.
What are the benefits and growth potential for Illinois companies?
TONY: You can test a product idea without putting in a lot of upfront capital. You just have to do a lot of social media work, a lot of viral advertising and that will make it grow exponentially. When people give, they tell their friends and that’s how it grows.
To put it in perspective, Illinois is one of the largest contributors to Kickstarter and Indiegogo in the world. I think in 2016, in the State of Illinois, we dumped over $50 million into Kickstarter and Indiegogo campaigns and I think $30 million from Chicago alone. So, if you can push even half of that money into actual investments in Illinois companies, you’re talking serious dollars that are getting put into Illinois companies. Couple that with the fact that money always follows money – large investors are going to see the support for these companies and put in their own money too.
Do you see traditional funding becoming more available?
TONY: I do know that some of the banks are exploring community lending through three types of venues and exploring having portfolios of higher risk investments where they can invest in these types of crowdfunded offerings, but the component too can also be used when, for example, a person is trying to start a business or needs more equity for their business to get that loan. They can use this to get that 20 percent equity or 30 percent equity and then get the loan. Plus, it’s more of a proof of concept in a lot of ways for both bank loans and, more importantly, for any kind of serious funding after that. If you’re going for Series A round, you can ask: “Look, if I can raise $500,000 on my own, would you give me a million dollars?” They might counter and say yes.
Is crowd funding good for rural Illinois areas?
ELLIOT: It could be perfect for those communities. In small towns, people may be very excited to invest small sums of money in businesses they believe in. It’s all about community.
TONY: Intrastate crowdfunding is so versatile. Put local dollars to work and make jobs, especially in areas that need it. It’s powerful to see what can be done. I wrote the law because I had become an expert on state laws and could see what needed to be fixed. That being said, the bill absolutely wouldn’t have gone anywhere without the SBAC.
ELLIOT: Intrastate equity crowdfunding captures the power of critical mass and allows Illinois residents to invest in one another. It can spark growth and create jobs in local economies. Education will be a key component in fueling the growth of intrastate equity crowdfunding. The SBAC will be working hard to spread the word about intrastate equity crowdfunding in 2017.
Thank you to Anthony Zeoli, partner at Freeborn & Peters LLC, Crowdfund Insider senior contributor and the Small Business Advocacy Council’s Innovator of the Year in 2016 as well as Elliot Richardson, president of the Small Business Advocacy Council, a nonpartisan, Chicago-based organization that rallies for small business.Visit sbac.org for more crowdfunding information.
Steve Banke is founder and CEO of 3Points, LLC. Stay tuned for future articles on small business topics in both the 3Points newsletter and blog posts. If you want to know more about the SBAC, email Steve or call him at (708) 491-0300.