April 4, 2016

Alternative Methods of Crowdsourcing Capital (PODCAST)

alternative crowdsourcing small business

When small businesses hear ‘crowdfunding’ they typically think of donation based sites like Kickstarter and IndieGoGo, amongst others.  While ‘donation-based’ crowdfunding is an option for entrepreneurs, it’s not the only option available.  In today’s podcast we look at crowdfunded loans and how that can be another avenue for food entrepreneurs to raise capital for their businesses.



Jennifer:Today we’re talking with Alex Mondau from Community Sourced Capital. Community Sourced Capital helps small businesses access capital in the form of zero interest loans crowd sourced from members of their own community or through Community Sourced Capital’s partner network of mission aligned lenders. Alex Mondau is the director of business development at Community Sourced Capital. He has a background in managing small business, and a MBA from Pinchot University. He leads Community Sourced Capital’s client work with small business owner’s perspective in mind. Thank you for joining us Alex. Really appreciate you giving us some time to share a little bit about what you’re doing.


Alex:Yeah. Well thanks for having me, and I’m really excited to kind of share our perspective on how small businesses, and especially food businesses, can raise money from people that love them.


Jennifer:Perfect. Well to start out, and just to kind of set the stage so that we’re all starting on the same page, can you share with us some of your thoughts on why capital in general, or why funding, is so hard for small businesses, small food businesses, these days?


Alex:Yeah. I mean I think small food businesses, historically, probably were accessing capital from maybe a home equity line of credit, savings they had from some previous profession, or perhaps a bank loan, but using collateral that they had in other assets in their life. The reality is after the recession, a lot of that collateral, or credit, has just gone away. The personal credit that you could leverage to launch personal business, which a lot of these small food businesses are, at least at their earliest stages, is just not really there. The world of banking is really designed around historical structures, around access to capital that is based on the house that you have as an underlying asset. That’s just not there.


Jennifer:Many of the folks listening, when we talk about crowd sourcing, a lot of folks are automatically going to jump to the idea of crowd funding. You’ve got sites like Kickstarter, Indiegogo, a variety of others. Can you tell us what Community Sourced Capital is doing, how loan based crowd sourcing is different than the Kickstarter/Indiegogo types?


Alex:Absolutely. We think of Community Sourced Capital as basically a zero interest loan from people that love you in about thirty days. We put those together by way of helping people tell their story that says, “I’d like to invite you in to participate in my business in a way where you’re sharing your money with me for a period of time, but just like I might return a bike after using it, I’ll return the money.” This helps people that may not be in a position to donate money to a for profit business, consider lending it, especially if that business’ success will be a positive experience for that citizen. Go ahead.


Jennifer:I was going to ask, so a couple questions then. About the loan aspect … I guess my first question is, one of the things that sometimes surprises entrepreneurs when you’re doing a donation based crowd funding campaign is that the money that you’re getting in from the donor, so to speak, is taxable because unless you are a 503C corporation, you are not a non-profit. Therefore the donations are taxable. This is a loan coming in to this business, does that get written in onto the balance sheet differently?


Alex:Yes, definitely. It is not earned revenue. It is definitely a loan and should land on the balance sheet rather than the P&L. If we really want to get into it. The challenge for small businesses that might run traditional, it’s weird to say traditional, crowd funding campaigns, like Kickstarter or Indiegogo, is that they need to do math around what the cost of any perks they’re going to send out might be, what the cut that Kickstarter/Indiegogo takes obviously. Then also the time and effort it might take to fulfill all those perks and promises, and because so many people now think of those sites as basically pre-sales, you’re kind of putting a value proposition in front of people where, “Hey if your perks are good, you’re going to raise money. If your perks aren’t, you’re going to struggle because other people’s perks are going to be really strong.” That’s a global marketplace that you’re participating in. While yes there’s a big reach, it may not actually be the people that will love your business.


Jennifer:No, absolutely. With the loan, I mean this is so interesting to me. Obviously just like any loan, the loan has to be repaid. How do the businesses who are working with Community Sourced Capital repay the loan to the “lenders?”


Alex:That’s where we come in. We really facilitate this transaction, this experience of zero interest lending within the community. Before we work with a business, put them on a platform, we first get to understand their finances to see that if they did get the loan would that put them in a position to one, execute their project, and then two, with that project in place, have the cash flow to repay the loan? If we think there’s a high likelihood that that is the case, then we’ll let them run a campaign. Then they’re making the commitment to their community that each month they’re going to make a payment on that loan, which Community Sourced Capital will then take and basically get out to the entire community of lenders so that each month, someone that has contributed, we call a square holder, will get an update from the business owner as like a paragraph, and then maybe two or three dollars of the fifty dollars that they’ve lent. Over the course of two years, they’re looking at probably most of their money being repaid. We schedule the loss we repay in three years or less.


Jennifer:Okay. You just talked about this idea that the campaigns have to be approved. What does a business sort of need to prepare in advance if they’re interested in working with Community Sourced Capital, the financials? What do they need to have in line before they contact you guys?


Alex:Yeah, well I mean they can contact us at any point and we can talk through exactly where they’re at and what pieces they might need to strengthen about the way that they’re thinking about their funding before they can run a campaign. They really need to be able to help us with them answer three questions with a strong yes. The first one is, is this capital useful? Meaning, with this capital, with this amount of capital, would you be able to execute your project on a timeline that is a near enough term to where your community will get to experience it? If you had the money, could you do the thing that you want to do? Yes, okay.


Next, is the capital affordable? Is it a responsible loan? That’s basically saying, if you got the money, and you did the thing that you wanted to do, would you then be earning to revenue to be able to repay this loan? Are the monthly payments affordable? To get to that answer you really need to have some forecasted expenses and revenue. For a lot of businesses that’s doable from your historical P&L and balance sheet, but if it’s a new business then they need to work on what we would call pro forma to put together their kind of future looking expectations around how much it’s going to cost to run the business, and how much they’re going to earn in revenue. If we can say, “Yes this is an affordable loan,” then we get to go to the last one which is kind of the whole point, which is, is this capital connected? Meaning, does the business have a project, a product, a presence in the community that when it grows, when it’s there has a positive impact on the experience of their stakeholders, such that people would be willing to share their money with them?


If that’s a yes, then we kind of drill down a little bit lower and we say, “Do you have the communication channels in place to be able to let those folks know that you’re doing this, that you’re running a campaign? Can you get people to your campaign page?” After that, “Are there enough of them to fund a loan?” It might be the five people that love my business, for sure I can get them on the website, but five people are not going to fund a twenty-thousand dollar loan.


A twenty-thousand dollar loan might have two-hundred people involved. “What’s your social media presence look like? What’s your communication that goes out through email? Do you get to talk to your people in person on regular basis?” All those ways we gauge whether this is a connected business. A business that’s connected, that can afford to make payments, and can use the money well is going to do great on our platform.


Jennifer:Excellent. For those companies that are approved, have you guys found, since you’ve been operating, that certain types of companies, or certain amounts of loans, or certain types of campaigns, are more successful than others?


Alex:Yeah. I mean, food businesses are thriving on our platform, and I think it’s because capital in the fifteen to twenty-five thousand dollar range can be a really really useful equipment, or the last piece of what they need to build out a space for a small business that’s doing food production. They’re also, I think, really lovable businesses. People care about, I mean they’re passionate about, what they’re putting in their bodies. Food businesses are pretty prime position to speak to a local community that wants to support them. Those businesses that already have some product out in the market, so people have experience what they’re cooking, certainly do better than people that are at an idea stage.


Jennifer:One of the other things that you guys do in addition to the loan based platform, is you also, it appears, have basically lending partners, or investment partners in the community that you can work to help connect to businesses. Can you talk a little bit about that too?


Alex:Yeah. Well, what we know is that our loan range from five to fifty-thousand dollars repaid over three years really meets one portion of what a business may be looking for in terms of capital. There’s certainly debt that needs to be longer term, five to ten years. There’s also plenty of businesses that could use more than fifty-thousand dollars, or perhaps could only raise ten-thousand dollars from their community, but really needs a twenty-thousand dollar loan. We work really closely with Craft3, which is a pacific northwest CDFI, a community development financial institution, to develop a matching capital program which means that if a business has raised ten-thousand dollars from their community, we can double that to be a twenty-thousand dollar loan. Still at zero interest.


Built on that success, we also partnered with the Seattle Good Business Network, the City of Seattle Office of Economic Development, Seattle Bank, and BECU to build another cool fund that’s specifically for Seattle made businesses, meaning businesses that are doing value added production, or small manufacturing in the Seattle city limits. Same program. A matching capital fund specifically for businesses, like food businesses that are doing development in Seattle. Those types of programs that I think let us still use our mechanism to keep people moving forward, but we all know, hey they may just need to be introduced to someone that has a mission about serving their type of business. Craft3, Mercy Corps Northwest, Community Capital Development are also partners of ours that we will bring people to if they’re the right fit. We first learn about the business and their challenge, and then make the ref feral rather than sending someone on a little wild goose chase.


Jennifer:You mentioned obviously, and you’re based in Seattle just like I am, but looking at the site not every business is just in Seattle. It does look like you have a reach. Can you just talk about that a little bit? I mean do you welcome in businesses that may not be in the pacific northwest?


Alex:Absolutely. We can work with businesses from all across the country. Our people, the folks that we have on our team, are based in Seattle and Portland. Certainly those folks that we get to know directly, and the relationships we were able to build in the pacific northwest mean more businesses have come from those areas than from others, but really the platform is useful for any community that wants to engage in funding a business that they’d like to support.


Jennifer:Fantastic. Well again, Alex, really appreciate you taking the time to share this with us. Just so everyone listening knows, again we’re talking to Alex Mondau of Community Sourced Capital. The website is Communitysourcedcapital.com, and we’ll have a link on the website, the small food business websites, that you can link out to them to learn more if you’re interested. Thank you so much Alex. Really appreciate all your insight today.


Alex:Thanks for having me.


Jennifer:Appreciate it. Thank you.


I hope you enjoyed today’s podcast and it gave you some food for thought with regards to alternative means of raising capital via crowdsourcing. Since access to cash is such a hot topic for food entrepreneurs, in the next podcast we’ll be talking with Elizabeth U, the author of Raising Dough about how socially responsible food businesses can find, raise, and access capital.

As always, if you find this podcast series informative, I invite you to tell other food entrepreneurs you know about it and subscribe to it on iTunes by searching for the words Small Food Business. I would love it if you would leave a review as that helps me know what’s resonating with you and helps other food entrepreneurs find the podcast in the iTunes system.

I also invite you to join the Small Food Business community at smallfoodbiz.com where you’ll find a ton of resources specific to food entrepreneurs as you start and grow your business. Our facebook page at facebook.com/smallfoodbiz is also a great source for food business information and we’re on a host of other social media channels as well. I look forward to connecting with you. Thanks!

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