From time to time The Line runs an Issue Media Update, an article from one of the many writers and editors across the country who contribute to the 19 online publications of Issue Media Group, The Line’s parent company. These pieces look at trends and topics of interest to Twin Citians from a national point of view.
If you’re an entrepreneur in the Midwest — a region often considered “flyover country” by venture capitalists flocking to the coasts — startup funding doesn’t always come easily.
Just ask Scott Davis, who quit his day job as a software consultant, lived off of savings and worked 60-hour weeks to launch his independent gaming company in Minneapolis.
“In the Midwest, startups need to be bootstrapped,” says Davis of QONQR, a location-based, multi-player strategy game that is played on smartphones. (See The Line’s coverage here.) “There aren’t a lot of business-to-consumer Internet companies in the Twin Cities. We don’t have investors knocking on our door; if we knocked on their doors, they probably wouldn’t answer.”
So Davis and his partners, who met at Twin Cities Startup Weekend two years ago, launched a Kickstarter campaign to raise gap funds that will allow them to grow more quickly. Their goal is to raise $25,000 in 40 days to build a “command center” for QONQR.
To reach this lofty goal, they are approaching friends, family and players for pledges. In exchange for committing $25 or more, backers will be able to download the new game.
Davis isn’t alone. Turned down by banks and overlooked by venture capitalists, many entrepreneurs have turned to crowdfunding — the fast-growing global trend of using the Internet to raise small amounts of money from lots of people — to raise startup funds.
Crowdfunding, which started as a way to fund artistic projects like a band’s next album, has grown into a tool for startups to raise money. Restaurants, shops, inventors, and even high-tech startup companies are now using it to bootstrap their next projects.
“In the past few years, bank loans to small businesses have become all but extinct,” says Candace Klein, founder of the Cincinnati-based crowdfunding website SoMoLend. “Crowdfunding opens up a new channel for getting funds to small businesses.”
A check, plus customers
Crowdfunding is a viable way to fund innovative startups, entrepreneurs say. Yet sites like Kickstarter, IndieGoGo and Rockethub can also help would-be founders test new ideas, develop a fervent base of customers and gain priceless marketing exposure.
“If you get a loan from a bank, you get a check and that’s all you get — you get no help,” says Mike Kane of Pittsburgh-based cellhelmet.com, which recently raised $19,080 from 344 backers to create a slim, sleek iPhone case with a one-year guarantee.
“With websites like Kickstarter, you not only get a check — you get customers, too.”
Kane crowdfunded his Cellhelmet case in part so that he could soft launch his bright idea. “We were three guys putting out a product and telling people if your iPhone breaks, we’ll repair it. We needed a way to validate what we were doing.”
He was thrilled when Cellhelmet’s Kickstarter campaign raised nearly twice its goal. The firm’s product — a protective iPhone case that doesn’t feel like a brick and fits easily in your pocket — resonated with backers. And so did the startup’s unique guarantee.
Cellhelmet offers a one-year guarantee against accidental phone damage if customers damage the phone while using the case. Kane discovered that while 15 percent of customers break their iPhones in the first year, no company had been bold enough yet to offer an actual guarantee. In a wildly saturated accessories market, Kane believed they might get noticed by offering the “stupidly simple” concept of a guarantee.
“Will the Cellhelmet case protect your iPhone more than the average case? Yes, it probably will,” says Kane, whose guarantee insures against accidental damage and charges a $50 deductible. “We have more of a bumper. But if you hit anything with a baseball bat, it’s going to break. Our real competitive advantage is our guarantee.”
Since launching the product two months ago, Cellhelmet has placed its iPhone cases in 30 stores and sold 2,000-plus units. Kane, who is committed to manufacturing his products locally, attributes much of his company’s success to crowdfunding.
“We’ve built a community on top of our customers — they pushed us further,” he says.
Although Kane wishes he’d made a higher-quality Kickstarter video, he’s since more than made up for it. Cellhelmet’s hilarious new Youtube video mocks other accessory companies who “dare customers to put their product to the test.” The film shows engineers hitting cell phones with golf clubs and dropping them from buildings.
Through ‘death valley’
While crowdfunding is far from a magic bullet or panacea, entrepreneurs say it can offer much-needed bridge funding that helps to accelerate the startup process for companies.
This is a critical issue — many startups perish before they make it through “death valley,” the time in which initial funding has been secured but the product has not yet launched.
Steve and Jessica Hoogendyk are the artists behind Geeta Games, a startup gaming company based in Portage, Mich., that is developing a family-friendly game called Lilly Looking Through. The Hoogendyks had originally planned on taking two years to launch their adventure game, yet a well-received demo quickly changed their minds.
“We released a demo and within a month we had something like 8,000 downloads from our site,” says Steve. “People asked, ‘When is it coming out?’ We wanted to collaborate with other artists and wondered if there was a way to get the game done more quickly.”
Steve and Jessica have stellar credentials in the gaming and filmmaking arenas. Steve has worked for several startup gaming companies in Los Angeles, and both worked as artists on such films as The Chronicles of Narnia, Harry Potter, and Cloudy with a Chance of Meatballs. The couple has lived in Seattle, Los Angeles, London, and Albuquerque, New Mexico while “chasing opportunities” in the film industry.
When they had their two girls, however, their priorities rapidly shifted. “With the movie business, you’re kind of a nomad,” says Steve, who became interested in “films and movie magic” after becoming mesmerized by Star Wars as a kid. “We wanted to put down roots and be closer to family.” So the couple decided to sell their house in Albuquerque, move to Michigan and create their own gaming company.
In Lilly, which features custom animation and hand-painted backgrounds, players help a young heroine navigate “enchanting environments brimming with magic and wonder, as she seeks to rewrite the past, change the present, and unlock the ultimate mystery.”
“We wanted to create something honest where you could see the brush strokes in it, like when you watch a Wallace and Gromit film and see the fingerprints in the clay,” says Steve, who adds that the game is partially based on the couple’s experiences raising children. “We wanted to create a game that kids and adults could enjoy together.”
To launch the game, the Hoogendyks needed well north of $100,000 to fund production costs. Although they were committed to launching the game themselves, seeing the fervent response to their demo convinced them to give crowdfunding a try.
On May 29, Geeta Games launched a Kickstarter campaign. The Hoogendyks’ goal was to raise $18,000 so they could afford to hire contractors they’d met through their film work. At the end of the month, they’d secured $33,516 from over 1,600 backers.
Although the campaign was successful and he deems the effort well worth it, Steve says it took up an entire month of his time. He and Jessica went from creating Lilly in their basement to managing a big social media campaign that quickly went viral.
“Even though Kickstarter and Amazon take a percentage and we offered rewards, we still got about $29,000 in the end,” says Steve, who cautions entrepreneurs to be conservative with the rewards that they offer. “There’s much more awareness of Lilly now. We knew even if we failed, more people would know about it than before.”
Making it real
Crowdfunding is not only a great tool for startups to raise much-needed capital, but it can also help new companies to catapult their ideas into a much bigger marketplace.
Josh Dryden, Sam Li and Pete Whitworth created nesl, a nine-fingered, flexible desk organizer, as undergraduate design students at the Cleveland Institute of Art. They learned about crowdfunding in one of their classes and were drawn to it as a way to help fund a real-world product which they could design, manufacture, and market.
“We wanted something in our portfolios that was a real object, not just a rendering,” he says. “As students, Kickstarter just seemed the easiest and was very accessible to us.”
This spring, the three partners launched a Kickstarter campaign to fund their project. It attracted the notice of Brookstone, a national retailer that sells home office supplies. The group landed the top prize in the William McShane Fund Kickstarter competition, and is now working with Brookstone to ultimately sell nesl in the company’s shops.
Birdhouse Studios, the company that Dryden, Li and Whitworth started, bills nesl as “a creative solution to desk organization that fits any work space.” While most desk organizers are not particularly easy to move around, nesl’s colorful, playful design has a suction cup that allows users to easily relocate it to any spot within a work space.
Within 30 days of launching its successful Kickstarter campaign, Birdhouse Studios had surpassed its goal of $30,000 with the help of 843 backers from across the world — including countries in the Middle East and Asia, much to Dryden’s surprise.
“Crowdfunding is definitely becoming a trend within the design field,” says Dryden. “The great thing for young people is that you don’t need a lot of knowledge and there’s not a lot of risk. It was reassuring to see that people we’d never met before liked our design.”
A boom market?
Crowdfunding is already a big market, yet it’s likely to grow even bigger in the next few years as new crowdfunding sites launch and equity-based crowdfunding takes effect.
Nearly $1.5 billion was raised for over a million different campaigns last year by 452 sites, according to industry group Crowdsourcing.org. That number is expected to grow exponentially once U.S. regulators approve a recently-passed law allowing regular people to buy stock in a startup company using crowdfunding. This equity-based funding is currently restricted to accredited investors, such as venture capitalists.
National experts say that crowdfunding could help to accelerate the growth of startups in parts of the country that are now underserved by traditional venture capital sources.
“What you have in the New York City and Silicon Valley markets are entrepreneurs and seed capital markets that are already established,” says Freeman White, owner of the crowdfunding website Launcht.com. “What crowdfunding will do in places where the market is not quite as established is to make everyone into a venture capitalist.”
Crowdfunding is already bringing fresh sources of capital to more than a few surprising places–including a tiny, off-the-beaten-path town in the Upper Peninsula of Michigan.
“We’re young and have energy, so we just jumped in,” says Melissa Hronkin of Algomah Acres Honey Farm in Mass City, Mich., of her successful Kickstarter campaign to raise money for a startup mead-making operation. Her husband makes mead in an old church on the farm. “If we hadn’t gotten funding, I don’t think we could have done this.”
This article is reprinted in partnership with The Line, an online chronicle of Twin Cities creativity in entrepreneurship, culture, retail, placemaking, the arts, and other elements of the new creative economy. Lee Chilcote is Managing Editor of IMG’s HiVelocity and Development News and For Good Editor of Fresh Water. He Lives in Cleveland, Ohio.