Crowdfunding Can Be a Great Democratizer for Small Businesses, But It Isn’t Yet

For being arguably the most democratic funding model, crowdfunding still comes with a lot of barriers. Experts say that can change.

(Photo via Oak and Grist)

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Oak and Grist Distilling Company, a hyper-local producer right outside of Asheville, North Carolina, was struggling to bridge the gap between production and sales. “Once distilled, our spirits must age for many years,” says William Goldberg, founder of the company. “The biggest financial challenge for our distillery was having to frontload much of our expenses into products that will age in barrels, taking years to make it to market.”

The solution? Local crowdfunding.

Crowdfunding is more than just a trend today. In this age of rapidly changing economy, generating funds only through traditional means may not be enough, so small manufacturers are turning to crowdfunding to fill the gaps.

“Crowdfunding is a powerfully democratizing force because it brings the funding decisions back to the community, where people who know the businesses best can decide which businesses deserve their hard-earned dollars to launch or expand within the community,” says George Cook, CEO of Honeycomb Credit, a lending and crowdfunding platform for small businesses.

Yet despite the numerous advantages crowdfunding provides, small businesses are struggling to access these opportunities owing to various socioeconomic barriers.

For instance, the Securities and Exchange Commission (SEC) requires a fairly extensive investment document called a Form C to be produced for every Regulation Crowdfunding campaign, and that document must include up-to-date financial information, projections and a host of other information. “We know some young businesses can struggle to produce the necessary documents and might not have the financial background, coaches or partners to help guide them through producing those documents,” Cook says.

Another problem is businesses that come from chronically underinvested communities are less likely to have wealthy networks or deep social capital, which means their ability to raise large amounts of money from the community could be hampered, he adds.

Finally, it can be quite difficult to stand out in the sea of online crowdfunding campaigns. Millions of campaigns are launched every year. Crowdfunding platforms like GoFundMe host hundreds of thousands of campaigns while Kickstarter alone lists half a million campaigns to date.

Barriers like this can significantly hold local manufacturers back, which eventually worsens the region’s economy. That’s why some crowdfunding experts say it’s important to dissolve the restrictions to crowdfunding so every business, especially small, local initiatives can thrive.

Mountain Bizworks, a North Carolina-based nonprofit, is one organization helping local communities bring about this change. The team works with cohorts of up to 15 small businesses to offer individualized coaching, business training and funding resources. The program, called ScaleUp, has been running since 2015, and two-thirds of their businesses are women-owned, while one-third are rural-based.

At its core, the program aims to reduce the barriers to capital and access to opportunities to support local business owners and entrepreneurs. For instance, last year in the midst of the pandemic, the organization worked with Oak and Grist Distilling Company to launch a local crowdfunding campaign. This cohort was funded by NC IDEA, a private foundation that supports entrepreneurs in North Carolina through grants and development programs.

(Photo via Oak and Grist)

“The program exposed us to alternative funding possibilities,” Goldberg says. “As part of the hosting services, Local Stake [an Indiana-based company that hosted their campaign] helped prepare and file the necessary paperwork. They also helped us navigate the regulations associated with an Investment Crowdfunding campaign so that we remained compliant with the SEC in our campaign marketing and outreach efforts, as well as the raise itself.”

Additionally, Goldberg says the program fit nicely with the distillery’s community-based approach. “Building awareness of craft spirits through transparency and education for the individual consumers, in addition to bars and restaurants, has been a significant focus for us,” he says.

Fortunately, the barriers to crowdfunding were lower for the team as they had a strong local network. This is not always the case for small local manufacturers. However, there are ways (both at an individual and at a societal level) to reduce the barriers to crowdfunding).

There is a substantial amount of planning and strategy involved in crowdfunding campaigns, says Chris Grasinger of Mountain Bizworks, and offering financial assistance isn’t the only way to help. “Education is key,” he says.

Access to education and other non-monetary resources can help local manufacturers in several ways, according to Honeycomb Credit’s Cook. “Broadening crowdfunding education, emphasizing digital literacy, modern marketing best practices and crafting a clearly articulated pitch will be critical for entrepreneurs looking to navigate the new capital landscape,” he says.

Finally, Cook and others believe there is an urgent need for a more flexible format where traditional means of funding can co-exist and build up on crowdfunding.

“Initiatives to match crowdfunded dollars with public dollars, such as the Michigan Economic Development Corporation’s Public Spaces Community Places program, are a blueprint for how the crowd and public entities will work together to fund the ideas and businesses our communities desire,” Cook says. “Institutional participation in crowdfunding from corporations and impact investors will help level the playing field for entrepreneurs.”

This article is part of “Centering Equity in Urban Manufacturing,” a collection of stories about the intersection of racial equity, manufacturing and community development as these issues relate to capital access, workforce development, land use and cultivating healthy manufacturing ecosystems. This journalism is produced with support from the Urban Manufacturing Alliance, which has released a report of policy recommendations entitled “Centering Federal Industrial Policy in Racial Justice and Community Development.” You can find the webinar we produced for this series here.

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Tags: small businessequityequity in manufacturingasheville

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