Crowd-funding sites pay off for pinched entrepreneurs
By Amanda Dolasinski
Published: Sunday, March 25, 2012
A dash of parsley, a little less vinegar and maybe a smidge more garlic.
Joey Zitzelberger spent days experimenting with seasonings until he got it right.
It was the perfect blend for the plump meatballs that soon would be smothered in bold buffalo, sweet habanero chili, creamy Alfredo and whatever wild sauce Joey thinks of next.
Once he and his wife, Sabrina, polished their menu, they didn't go to a bank for a loan they knew they couldn't get. They headed online to post a video, hoping to attract support for their dream restaurant — an eclectic meatball shop somewhere in the Pittsburgh area.
"Our credit isn't the greatest," Sabrina said. "This wouldn't have happened without Kickstarter — at least, not now."
Like thousands of other pinched entrepreneurs, the Zitzelbergers used what is known as a "crowd-funding website" to go after the money they needed for their restaurant. Two months and $10,426 later, the Zitzelbergers are getting ready to sign a lease in Sewickley.
Entrepreneurs, inventors and artists turned to crowd-funding websites, such as Kickstarter, Peerbackers and IndieGoGo, when bank funding dried up. The websites have become a solution for small businesses shut out of getting bank loans, Jerry Ross, executive director for the National Entrepreneur Center, based in Orlando, Fla., said.
"Ninety-three percent of the businesses in Florida have less than 10 employees and that's true for about the whole country," Ross said. "Small businesses didn't get stimulus money, so they're dying from a lack of capital — and that's the same group that produces all the jobs."
Currently, there are 21 Pittsburgh projects — ranging from a custom-art skateboard company to an app that would allow a user to edit 3-D animation and motion graphics across multiple platforms — on Kickstarter. Since Kickstarter's 2009 inauguration, 131 projects have raised $789,000 in the Pittsburgh area.
"It's a great way for a small businesses to get access to the capital they need to stay in business," Ross said. "Anything we can do to accelerate a business from a first stage to a second stage, you get an exponential increase in jobs."
It's a much different experience than going to a bank for a loan.
"What you would have to do in a (traditional) situation, you have to go to someone with a lot of expertise who grills you," said Dennis Galletta, professor of business administration at the University of Pittsburgh. "This is something that might intrigue people that might not be so sophisticated."
Even Congress is paying attention.
The Entrepreneur Access to Capital Act, targeting crowd-funding websites to make starting up businesses easier, is on its way to the Senate after sweeping through the House 407-17.
The bill, introduced by U.S. Rep. Patrick McHenry of North Carolina, would allow those seeking funds on crowd-funding sites to raise up to $2 million without providing financial records to their backers. It eliminates the need to file paperwork with the Securities and Exchange Commission, which can be complex and costly for startup businesses with limited capital.
McHenry could not be reached for comment about the measure.
When Mike Kane, co-owner of cellpig.com in Latrobe, needed to establish a customer base for the company's new cell phone case, he turned to Kickstarter.
"It can be kind of scary to buy an insured product basically off a mom-and-pop shop on the internet," he said. "We thought Kickstarter would be a great way to show this is a legitimate product."
In seven days, the cellpig.com team hit its $10,000 goal. When the allotted 30 days ended, they collected $19,080.
The uncertain economy has heightened the competitiveness for grants.
That's a void that Peerbackers, a crowd-funding site focused on inventors and entrepreneurs, hopes to fill. When it started, five to 10 business would post each day; now, more than 25 are posting, co-founder Andrew Rachmell said.
And even more people — with disposable incomes — are cruising the website to fund the hottest new inventions.
"We're probably getting several thousand hits a day from backers," Rachmell said. "If an entrepreneur goes to get a loan, they're sort of at the mercy of the bank. You have to have a certain credit score, you have to have a certain amount of assets the bank can collect if you default ... now your success or your failure is in your own hands."
Crowd-funding websites typically set a time limit to raise funds, and most charge a platform fee to post the project.
Kickstarter stresses "rewarding" backers in lieu of returns on investments. A backer earns a reward that the entrepreneurs deem equal to the donation each makes from a tiered scale. For example, a $10 donation for Joey Z's meatballs gets those backers a free sandwich and fries.
Kickstarter only sends the money if the goal is met; others like Peerbackers will send the entrepreneur whatever is raised during the allotted time.
But meeting funding goals is easier said than done.
Only about half of the projects posted to Kickstarter reach their goals. Peerbackers' success rate hovers around 20 percent.
In order to be successful, Rachmell said he encourages entrepreneurs to send out social media blasts to connect with friends and complete strangers.
"An entrepreneur must be proactive," he said. "A lot of entrepreneurs think they can post on a crowd funding site, sit back and collect the money — that's not the case."
Artists, inventors and entrepreneurs don't seem to be intimidated by the odds. Kickstarter alone is on track to distribute more than $150 million to projects this year — $4 million more than the National Endowment of the Arts.
It's an admirable accomplishment, but can't entirely replace government grants, said David Seals, spokesman for the Pittsburgh Arts Council. For starters, one-time cash donations can't keep up with regular salaries or lease payments, he said.
Instead, Seals said he is seeing artists using Kickstarter to complement funding they receive in addition to grants and other donations. The council awarded $203,000 to 99 recipients last year, he said.
"The one weakness I see is, there's no one looking out for people who don't have money," he said. "If people are voting with their money, (then) people who don't have money don't have a way to make sure art is happening in their communities. That's where state art funding comes in."
A sample of past successful local Kickstarter projects includes a panoramic video lens for iPhones ($169,209), reflective bicycle strips ($8,380) and a mobile breast-feeding bus for mothers who are shamed for breast-feeding in public ($15,577).
A speciality organic market ($12,776) , two bee hive apiaries ($1,076 and $3,695) and a pop-up Indie book store ($3,853) were approved community projects.
Remember 10-year-old Jackie Evancho who wooed listeners with her big voice on America's Got Talent• The Pittsburgh native raised $1,000 from Kickstarter for an album in July 2010.
Even the Toonseum, in Downtown Pittsburgh, turned to Kickstarter for help. The cartoon museum raised $3,141 in September 2011.
"This is a platform where communities rally around ideas," said Justin Kazmark, spokesman for Kickstarter. "It's not like you walk into Wal-mart and buy something off the shelf. You can meet the maker. There are creative people all over the place in Pittsburgh and you can connect with them directly."
who got help
A look at some of the Pittsburgh-area projects funded on Kickstarter:
What it is: A lens that snaps to the iPhone 4 to make 360-degree panoramic videos.
FIKS: Reflective Bicycle Rim Stripes
What it is: Reflective strips to increase night visibility for bicycles.
What it is: The casual bistro expanded and moved to a larger space at 214 N. Craig St., Oakland
What it is: An iPhone case that guards against physical damage.
The Milk Truck
What it is: An old ice cream truck — with a giant breast on top — arrives to a location of women discouraged from breast-feeding in public. The truck provides the woman a place to breast feed.
What it is: A community apiary and pollinator garden at the intersection of Dallas Avenue and Susquehanna Street, Homewood
What it is: A take-out restaurant, at 124 S. Highland Ave., East Liberty.
Joey Z's Meatballs
What it is: Specialty meatball shop opening in Sewickley.
What it is: Two-day festival that pays tribute to Woodstock through art, music and bellydance.
You must be signed in to add comments
To comment, click the Sign in or sign up at the very top of this page.