February 4, 2013

Startups Look To Crowd Funding For Needed Capital

Westborough entrepreneur Peter Alberti combined his love of animals with his IT expertise to create PetChance.org, a crowd-funding platform to help pet owners pay for veterinary bills.
worcester business journal illustration

Crowd funding has taken off over the past three years, driven largely by musicians and artists raising money for albums or projects.

But startup companies and entrepreneurs in Central Massachusetts, drawn by a decidedly unique way to raise extra capital, have started to employ the strategy to fund their projects.

In recent months, an established music tech firm in Whitinsville, as well as a tech marketer trying to launch a business incubator in MetroWest, have run crowd funding campaigns online. And an entrepreneur in Westborough has created his own crowd-funding software that's fueling his nonprofit business to help pet owners in need.

Crowd funding, defined as an open call over the Internet for financial resources in exchange for future products, services or rewards, is one of the newest ways startups can get seed money, and it's unique from other funding sources.

Unlike with bank loans, crowd-funded startups are not required to pay back the money.

And unlike formal investments by family, venture backers or angel investors, crowd funders cannot legally offer equity in their projects in exchange for donations. (That will change when financial regulators finalize regulations for The Jobs Act of 2012, which allows for equity crowd funding, with restrictions.)

For now, instead of equity, startups instead think up product-related incentives, such as beta versions, free memberships, T-shirts or other tokens of appreciation to spur donations.

Still a fairly young phenomenon, crowd funding is getting a lot of attention from economists and academics, and understandably so.

Kickstarter.com, launched in 2009 and arguably the most popular crowd-funding platform, has hosted about 83,000 campaigns, which have resulted in donations totaling $398 million to those raising funds, according to its website. The amount raised by the average crowd funder is smaller than a typical bank loan or venture capital round, to be certain, but Kickstarter reports that an impressive 43 percent of campaigns achieve their fundraising goals.

Crowd funding may sound enticing, but if getting what is basically free money over the Internet sounds easy, think again, Central Massachusetts entrepreneurs say.

Fundraisers must spread the word through their networks, provide regular updates and think up creative — but inexpensive — incentives to spur donations. Without that effort, campaigns are likely to fall short.

Here's what happened with three campaigns:

A Better Band Practice

Though Whitinsville-based JamHub Corp. is certainly not the typical "campaign" web surfers would see if they scanned Kickstarter, it's not far-fetched that a good chunk of the site's users could be potential customers.

JamHub makes recording and rehearsal technology for musicians. Unlike most crowd funders, the company has already gone to market with a product and last year received $1.1 million from angel investors. As if that weren't impressive enough, Jim D'Addario of Long Island-based D'Addario Strings — a name almost any musician would know — has signed on as a board member. And cymbals maker Zildjian, based in Norwell, is an adviser.

Headquartered in a refurbished mill building on Main Street, JamHub released its hardware console, called the JamHub, in 2009. The semicircular-shaped console allows musicians to plug in and hear themselves and their band mates while remaining quiet to the outside world. The JamHub lets musicians adjust the mix they're hearing, allowing each instrument to be heard clearly in stereo sound.

But it's JamHub's next project that pushed the company to try Kickstarter, said Steve Skillings, a former Bose Corp. engineer who plays guitar.

Skillings said he and his team are developing recording software called BandLab that would let band members in different locations share and edit the tracks they're working on through the cloud.

The sheer number of musicians who frequent crowd-funding sites is not lost on Skillings.

We said 'Wait a minute! These are the people who need this product most,'" he said.

He said the BandLab will integrate with the JamHub, automatically pulling recorded tracks and putting them in the cloud. But the product will be "brand agnostic," Skillings said, meaning it will also work with other types of gear.

In its Kickstarter campaign, JamHub raised just under $3,600 from 33 donors, well less than the $53,000 goal the company had set.

With Kickstarter's "all or nothing" model, the donors will be refunded their money.

"Candidly, raising $3,572 is a poor showing, so clearly we missed the mark," Skillings said.

A big showing would have sped up development and commercialization. But all is not lost. The company is pushing ahead with development regardless, he said.

Though JamHub missed its goal, Skillings believs the crowd-funding experience helped expose JamHub's products to a wider audience of musicians, and he hopes to tweak some of the incentives JamHub was offering — such as a year of free storage for those giving $100. The fact that the campaign ran over the holidays may have impacted the result, too, he said.

Goodbye Boston Commutes

Barbara Finer believes the tech entrepreneur community is ill-served in MetroWest, where there are plenty of medical device, IT and software professionals. Many commute to offices in Boston or Cambridge, which can mean two or more hours a day if there's traffic.

"It's not as conducive to getting things done," Finer said.

And even if they work in MetroWest, those with the entrepreneurial bug tend to seek the myriad networking opportunities in Boston to "feed their brains" at organizations like the MIT Enterprise Forum and Mass Challenge, said Finer, a B2B-tech marketer and entrepreneur herself.

"Scientists and engineers are nerdy by nature, and they love hanging out and learning from each other and it's important they really keep up to date on things," Finer said.

The situation leaves her asking: "Why isn't anything happening out here?"

Of course, there are incubators in Central Massachusetts, including Massachusetts Biomedical Initiatives at Worcester Polytechnic Institute and the Tufts Biotechnology Transfer Center in Grafton, which focus on biotech startups.

Finer's idea is called the Tech SandBox — a combination of tech incubator space with a dose of networking and advice from industry experts. Because MetroWest doesn't have the tech density of Cambridge, Finer envisions more one-on-one interactions than the Boston-based groups that are inspiring the idea. The incubator would offer low-rent, co-working space to companies with one or several employees and would be able to house about 20 resident entrepreneurs with space for events for many more members, she said.

Finer, a board member of Worcester Polytechnic Institute's Venture Forum, said Tech Sandbox would be different because it would be located in MetroWest and would have an incubator. And, she envisions its events would run more frequently.

Finer is working plenty of funding and sponsorship channels, but she wanted to see if she could leverage the crowd, too.

Her RocketHub.com campaign (another of the big three crowd-funding sites) wrapped up in November, raising $9,000 from 73 donors, short of her $35,000 goal. On Kickstarter, she wouldn't have been able to receive the funds. But RocketHub's "all or more" model allows her to use the money for the project, though she had to pay a slightly higher commission to the website as a result.

"You can aim low or shoot the moon," Finer said. "I decided to shoot the moon."

Getting those donors wasn't easy. Finer said she had to put in more than 100 hours to run the campaign, putting out the word to as many as she could and providing web updates to donors.

But she said some potential donors didn't understand what she was asking for. "Some didn't understand it was $50, not $20,000," she said.

Combined with sponsorships and in-kind support from area firms, the money will certainly help.

Finer said she's very close to working out a deal for incubator space. The market value of the approximately 4,000 square feet she's seeking would be about $60,000 per year, though she said she hopes to get the space donated to start.

She has also applied for not-for-profit status to allow the Tech SandBox to apply for grants and other funding.

Giving Pets A Chance

Northborough resident Peter Alberti, who has worked in strategic business development and IT, is fascinated by crowd funding, having read up on the psychology of it and what makes fundraisers and donors tick.

That has become especially important since last year, when Alberti launched his own business on Lyman Street in Westborough after writing his own crowd-funding software.

PetChance, for which Alberti recently applied for nonprofit status, enables pet owners to post a campaign — called a "chance" — on PetChance.org to raise money for their pets' medical procedures. Pet owners can raise funds for an upcoming procedure or help pay a veterinary bill. PetChance verifies the information and pays the clinic directly to help deter fraud.

"Our mission is to get pets the proper treatment," Alberti said.

He estimates that 6 percent of pet owners can't afford to pay or can't get credit to pay to treat their pets.

Area veterinary clinics are aware of PetChance and tell customers about it, Alberti said. "They're bringing people to us," he said. "They help get the word out."

Since launching in September, people in 17 states have registered chances for their pets, almost all of them cats and dogs, Alberti said.

"It turns out it's not hard to attract clients," he said.

But what's harder is attracting donors. Alberti often ponders what would cause someone to donate to a pet's medical treatment. He thinks it comes down to a combination of loving animals, guilt, sympathy, empathy and the gratitude pet owners display in thank-you notes and follow-up information.

For example, a man in Chicago has donated more than $1,000 so far, Alberti said.

He said pet owners often hold the fate of their chance in their own hands.

"With crowd funding, the biggest barrier to success is not understanding how it works," he said. "You need to put in a lot of effort, or you raise nothing."

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