Kickstarting the Indie Food Scene

I've been a bad blogger, I know. I will not even tally up how many weeks have passed since my last post! So thank you for hanging in there. I intend to revive this blog - and indeed build it into something much bigger - in the coming months. In the meantime, let me ease back in by sharing a story I recently wrote for Edible Manhattan about Kickstarter and its role in funding a new crop of indie food entrepreneurs:

THE EDIBLE ECONOMY: RAISING DOUGH
First published in the November-December 2012 edition of Edible Manhattan

When Dan Maniaci and Piergiorgio Maselli were Boston College students with an appetite for more than knowledge, burgers were a shared obsession. Sliders, Big Macs, Shackburgers, animal-style In-N-Outs—they devoured them all (Maniaci earned the nickname “Tapeworms” after scarfing 11 cheeseburgers in one sitting).

Still, for all the great burgers they could order while out, the two undergrads lamented the pathetic state of patties made at home: overcooked and drowned in ketchup. So they began making their own burger sauce in an effort to resuscitate the home burger experience.

From their tiny dorm kitchen, the pair experimented with recipes and tried them out at tailgate parties until they hit on their Top Secret Burger Sauce— Maselli likens it to “a zesty mayonnaise with some spice.” After graduating in 2010, they moved to New York (“burger nirvana,” says Maniaci) with big plans to launch Gotham Sauce Co.

But, like many would-be food entrepreneurs with little credit history and no collateral, they found the up-front costs—renting a commercial kitchen space, contracting with a manufacturer, securing the right permits—were out of reach. “We didn’t even bother going to a bank,” says Maselli.

In years past, their story would have ended there. Instead, this September, Maniaci and Maselli turned to Kickstarter, a three-year-old company on the Lower East Side whose Web site lets ambitious but underfunded entrepreneurs appeal directly to friends, fans and future customers who believe in their idea. They put together a video pitch explaining their quest “to give the homemade burger a better life” through their secret sauce. And they promised perks to anyone who made a donation—from “a warm and fuzzy feeling” for a $1 contribution, to a bottle of Top Secret Burger Sauce for a $10 pledge, all the way up to a gourmet tailgate party cooked by the two 24-year-old entrepreneurs for a $2,500 pledge.

On September 15, just four days into a monthlong funding campaign, they hit their $5,000 goal—modest seed money that would allow them to start commercial production and shop the product around. But contributions continued to pour in, from friends, family, classmates and random burger lovers. With more than a week to go, 950 people had chipped in a whopping $18,500.

Maselli, a New York native now in law school at St. John’s, called the tremendous response “a vindication” of the venture. He and Maniaci are finalizing arrangements with a co-packer and plan to ship their first products in December. Armed with bottles, they can also begin calling on specialty stores and supermarkets, he adds.

Welcome to the Kickstarter economy.

Read more here or go to http://www.ediblemanhattan.com/featured-article/raising-dough/ 

In Defense of Crowdfunding

Crowdfunding legislation is tantalizingly close to becoming reality—the Senate is expected to pass a version of a bipartisan House bill within days. But a rash of negative publicity threatens to derail this important update to antiquated securities laws that hamper small business capital raising.


The problems stem from the Jump-Start Our Business Start-Ups act—JOBS, for short—a House package that rolled together a number of largely uncontroversial bills aimed at spurring small business capital raising, and added some new ones. JOBS has provoked a fierce outcry from consumer protection groups, regulators and pundits, who evoke alarming images of coke-snorting boiler room operators, Nigerian scammers and pump-and-dump research analysts. It seems this bill will make "Muppets" of all of us.


Let's all take a deep breathe and consider this.


The elements of JOBS sparking the most backlash are provisions that loosen regulations on public and pre-IPO companies, including exempting publicly traded "emerging growth companies" from certain reporting requirements, and letting issuers and financial firms peddle securities to accredited (aka wealthy) investors. Fair criticism. I don't see anyone taking issue with other elements of the bill, like raising the ceiling for Reg A offerings and increasing the number of shareholders (from 500 to 1,000) a private company can have before it is considered public.


The other key element of the package is a crowdfunding bill that had previously passed the House with near unanimous support. Crowdfunding has its share of detractors, for sure. But much of the recent criticism seems to be unfairly tarring crowdfunding and other good elements of JOBS with the same broad brush. In the Times, Floyd Norris declared crowdfunding "a major victory for Wall Street." 


That couldn't be farther from the truth.


Crowdfunding, as most people by now know, is a fundraising model where lots of small sums are aggregated from lots of people. Think Kickstarter.com, Kiva.org, and President Obama's initial presidential campaign. Crowdfunding legislation would move that model into the investment sphere, so  entrepreneurs could tap into their social networks to raise capital, and allow those investors to share in the profits. It's Kickstarter with a financial return. 


Under existing rules—rules that were crafted in the 1930s, in the age of ticker tape and telegraphs—that is illegal. Private companies may only raise money from accredited investors. If they want to reach out to their customers, their friends and family, their neighbors or social networks—a perfectly natural impulse—they must hire lawyers and accountants to guide them through a registration process and produce a bulky prospectus that hardly anyone reads. This process can easily cost $1 million or more—making it a non-starter for small firms that only need $10,000 or $100,000 or even a million.


These small firms are shut off from a huge pool of potential capital, at a time when bank lending and seed funding is down dramatically. And ordinary Americans are unable to invest in companies that they know and love and support.


Having spent the past two years talking to small businesses and investors, I can tell you that people want to invest this way. They would like to put their money in companies that they know, that are part of their community, or doing things they believe in. Just look at the success of Kickstarter, which has raised tens of millions of dollars in contributions for creative ventures. The site logged $1.6 million in pledges in a single day this week.


Before it shut down last month under pressure from regulators, ProFounder.com—a crowdfunding platform cofounded by a founder of Kiva—helped dozens of small businesses raise money from friends and family. This kind of capital is supportive, nurturing capital. It's the antithesis of vulture capital or "ripping the eyeballs out" of Muppets.   


In fact, crowdfunding presents a badly needed alternative to Wall Street-style investing. Just as Kickstarter allows independent artists to bypass the traditional gatekeepers like record studios and publishers to get their works produced, crowdfunding can help entrepreneurs with good ideas or promising growth potential get funding that is not forthcoming from banks or VCs. Millions of Americans have moved their money out of big banks to credit unions and community banks; many may want to do the same with some of their investment dollars.  


Yes, there is risk. Investors could lose money or be victims of fraud—just as they can in the stock market. Most of the proposed crowdfunding bills limit the amount that individuals can invest in a crowdfunded venture—the highest allowable amount among the bills is (the lesser of) $10,000 or 10% of their annual income—so the amount any one investor could lose would be limited. (In comparison, there is no limit to what they can lose in the stock market or at the casino, for that matter). The amount a company can raise is also limited, to $1 million (or $2 million with additional disclosure).


It is the risk of fraud that has most critics' knickers in a knot. Without a doubt, hucksters will ooze out of the ether. But there are commonsense measures included in the crowdfunding bills that can address the risk. For example, the Senate bills require companies to go through a crowdfunding intermediary to raise funds. The intermediaries (the equivalent of a Kickstarter or eBay) must register with the SEC. And they must hold funds in escrow until the money is released to the company raising it. In addition, state regulators can prosecute any offenders if someone manages to pull off a fraud.


The crowdfunding intermediaries will also perform a basic level of vetting of the companies they list on  their sites, such as background checks of principals and the like. And let's not underestimate the power of  hundreds or thousands of people dissecting a business plan and crowd-vetting an idea or a company. The Internet brings a new level of transparency to investing, in ways that the framers of the 1930s securities laws could never have imagined. In fact, crowdfunding has the potential to be more transparent than many other investments we can routinely make. Do you know what's in your emerging market mutual fund, or what the hidden fees are, for example? Do you really know what is going on inside that blue-chip bank whose stock you own? (Here's a hint)


Crowdfunding has been taking place for nearly two years in the UK without a hitch, funding hundreds of local businesses. Luke Lang, a cofounder of Crowdcube.com, which has raised more than £2.5 million in equity capital for more than a dozen companies since it launched a little over a year ago, fully expects some companies to fail; that comes with the territory. But so far there has not been a whiff of fraud. Likewise, on Funding Circle.com, British investors have lent more than £23 million to about 600 local businesses in the less than two years, with nary a Nigerian scammer or boiler room creep. 


The bottom line is, the financial system is broken. Small businesses—which create the majority of jobs, contribute half of private GDP and provide the biggest economic boost for their communities—are going begging for capital. Investor protections are predicated on the public markets, yet those markets are closed to 80% of the companies that need them, according to a report by Grant Thornton (pdf here). Small firms are simply priced out. The median IPO size has risen from $10 million 20 years ago to roughly $140 million today. 


We need alternatives. Done sensibly, with the right precautions built in, crowdfunding could unleash a new wave of innovation and job growth. The potential rewards vastly outweigh the risks. I hope Congress and the pundits will separate this issue from some of the more problematic proposals in the JOBS package. 

Starbucks Revisited

Remember Starbucks' Create Jobs for USA program?


The java giant launched the program last fall in an innovative effort to help stimulate the economy by getting money into the hands of micro-entrepreneurs and small businesses that could create jobs—if only they had access to funding. The program is sort of a "counter-to-community" model: Starbucks customers are encouraged to donate a few bucks after buying their Caramel Macchiatos. The aggregated funds are then funneled to community development loans funds, which make loans to entrepreneurs in low-to-moderate income areas that conventional lenders deem too risky. These loan funds have an impressive record of success and job creation. (See my previous post on this)


The program is off to a promising start. Since November 1, customers have donated more than $2 million. Assuming an average donation of $5, that's about 400,000 customers. Add in the $5 million that Starbucks kicked in, and we're looking at $7 million being injected into underserved communities. The money is leveraged by the community loan funds for maximum impact: every $5 from the Create Jobs for USA program translates into $35 worth of loans.


Those are the numbers, but here's what it looks like in action.


In Elkins Park, a tree-lined Philadelphia suburb, Starbucks customers are helping to fund a new food cooperative called CreekSide Co-op. The Reinvestment Fund, a Philly-based community loan fund that is one of the 63 such organizations to receive funds from Create Jobs for USA, is making a $2.2 million bridge loan to the coop. That will allow it to complete construction, after which it will qualify for a USDA loan guarantee program. In addition, CreekSide Co-op has raised $280,000 from its members, who earn up to 6% on their money, in an ongoing member loan campaign.


The CreekSide Co-op is expected to create 47 fulltime positions and 28 construction jobs. And locals hope it will help revive the area's flagging retail district, which has suffered since a popular, locally-owned grocery store sold out several years ago and foot traffic trailed off.  Jon McGoran, a Creekside Co-op board member and Elkins Park resident, notes the experience of Mount Airy, another Philadelphia neighborhood. When the Weavers Way food coop opened a few decades ago in a quiet spot there, other businesses soon followed, including a bookstore, a yoga studio, a creperie and an architectural salvage shop, creating a vibrant retail center and what is today one of the area's most coveted neighborhoods. McGoran, who works at Weavers Way, said Mt. Airy coop is also lending money and expertise to CreekSide.


In Buffalo, New York, a community health center is another recipient of a Starbucks-supported community loan. After several hospitals and primary care facilities in the area were shuttered, patients visits at the Community Health Center of Buffalo swelled. The center was able to expand to 50,000 square feet thanks to a $450,000 loan from Primary Care Development Corp., a New York-based community development financial institution (CDFI). The expansion enables the center to provide primary and preventative medical care, dental and behavioral health services more than 12,000 low-income residents, and has created jobs across a spectrum of skill levels, ranging from entry-level clerical to licensed professionals, in an area that badly needs them.


These are just a couple of examples of how the spare change donations of ordinary citizens can have a real impact on neighborhoods in need. Better yet, many community development loan funds allow individuals to invest directly in their own communities, in return for CD-like returns in the low-to-mid digits. To find a loan fund in your own area, check out the Opportunity Finance Network's CDFI locator.

The Future of Crowdfunding

This past weekend, crowdfunding pioneer ProFounder.com shut down. Hopes has been high for ProFounder, which set out to help entrepreneurs and small businesses raise money from their friends, family, customers and community. One of its founders, Jessica Jackley, was a cofounder of Kiva.org, the wildly popular microfinance site that has raised hundreds of millions of dollars for micro-entrepreneurs throughout the world since it launched in 2004. Could ProFounder do the same for the many entrepreneurs and small businesses held back by a lack of capital in the U.S.?

In its first six months, ProFounder raised more than half a million dollars from 302 investors for 18 companies, including a Hawaiian "shave ice" shop and an electric motorcycle maker. Sadly, Jackley and cofounder Dana Mauriello, who met at Stanford Business School, found that U.S. securities laws made it difficult for them to proceed. Despite their best efforts to comply with state and federal regulations, they drew the ire of the California regulators, who issued a cease & desist order in August. A message on their web site explains:

Despite our progress, the current regulatory environment prevents us from pursuing the innovations we feel would be most valuable to our customers, and we’ve made the decision to shut down the company.

Observers pointed out the irony that, just a week before ProFounder's demise, the crowdfunding world hit a major milestone: two separate deals raised more than $1 million each. In a Kickstarter campaign ended on Feb. 11th, Elevation Lab raised just under $1.5 million for a new docking device for the iPhone, while Double Fine Adventure, an adventure game, is poised to blow past $2 million with more than two weeks to go.

Uncle Clay's House of Pure Aloha raised money on ProFounder 

Crowdfunding is clearly striking a chord. On Kickstarter, people are pledging more than $2 million a week to projects they support—a figure approaching the entire annual operating budget for the National Endowment for the Arts!

But ProFounder was different. Site such as Kickstarter and Indiegogo raise money mainly for artsy projects like documentary films, music CDs, and computer games. Small businesses have been turning to these sites more and more with some success—La Casa Azul, a bookstore in East Harlem, raised nearly $40,000 on Indiegogo to open a bookstore that would cater to the Latino community there. But it's not always a good fit.

ProFounder, in contrast, was designed for small business entrepreneurs.

The other main difference is that Kickstarter, Indiegogo and their ilk raise money from supporters with no expectation of a financial return. In other words, people donate money to projects they want to support in return for an in-kind reward, like a CD, a t-shirt or a credit in a film. It's arts patronage in the digital age.

Meanwhile, on Kiva.org, the microfinance site Jackley co-founded, loans are paid back (the site has a 99% repayment rate), but without interest.

There's more than altruism going on. If a financial return were introduced, these transactions would become securities subject to federal and state securities regulations. And those regulations make it illegal for privately-owned businesses to seek money from ordinary investors without first spending a massive amount of time and money to hire lawyers and accountants to register the offering with the SEC and relevant state agencies. The cost of registration typically swamps the small sums being sought, so it is not a viable option for most small businesses.

Yet that is the realm that Jackley and Mauriello bravely entered with ProFounder (this kind of fundraising is often called Crowdfund Investing to differentiate it from donation-style crowdfunding). Their vision was to help entrepreneurs reach out to their social networks—friends, family, neighbors, fellow students or loyal customers—to raise money in return for a small share of the revenue.

They called their brand of crowdfunding "community-funding," since it is a much more intimate form of investing than tapping an anonymous crowd. Although regulators are rightly concerned about protecting small investors, this kind of community-funding is much less vulnerable to the charlatans that troll the Internet, precisely because of the social bonds and accountability that exist in these networks.

Like many crowdfunding advocates, Jackley and Mauriello were hoping that legislation working its way through Congress that would make it legal for ordinary Americans to invest in small, private businesses would pass, opening up new opportunities. Yet, despite strong bipartisan support, the legislation is currently hung up in the Senate and is facing strong resistance from state regulators.

(To learn more about these bills and voice your support for crowdfunding, see legalizecrowdfunding.org and WeFunder)

The result is that innovation in a vital area—the intersection of social media and finance—that could create jobs and rebuild local economies and Main Streets is being stifled.

While we dither, Crowdfund Investing is taking off in other areas. In England, for example, securities laws are more accommodating and crowdfunding sites have been operating for more than two years now with no fraud, scams or wiped-out investors. Funding Circle, a two-year old London-based website, has rased more than £25 million in loans for British small businesses, earning investors average gross yields of 8%. Crowdcube, an equity-based crowdfunding site also based in London, just marked its one-year anniversary with £2.7 million raised in equity for 11 companies, including Kammerling's, the maker of a ginseng-based artisanal spirit, and The Rushmore Group, which owns three clubs in London. It even crowdfunded itself to the tune of £300,000.

And herein may lie the ultimate irony. As Americans, we pride ourselves on being innovators, the home of companies like Apple, Google and Facebook that are admired around the world. Yet when a Facebook for Finance emerges, it is not likely to be in California or New York or any other U.S. city. As one British crowdfunding entrepreneur told me: "It used to be that you came up with a good idea over here and the first thing you did was hop on a plane to the U.S. to get it funded." In fact, when developing Seedrs.com, a soon-to-be launched equity crowdfunding site, he considered the U.S. but concluded that securities laws made it impossible to operate there. Now London and other European cities, he says, are becoming new centers of innovation.

I hope our leaders are listening.

Paradise at a Crossroads

I didn't have to think very long when I was asked to be a presenter at TEDx Maui. Hawaii in January? Are you kidding me? Beyond escaping New York in the depths of winter, I was truly excited about this event, Maui's first TEDx. And in doing some research for my talk, I began to appreciate just how fragile these majestic islands are.

Despite being blessed with an abundance of natural resources—volcanic soils, a year-round growing season, plenty of sunshine and cooling breezes—Hawaii imports roughly 90 percent of its food and energy. The lush land that conjures up visions of pineapples, coconuts and mangoes even imports 65 percent of its fruit! And Hawaiians pay the highest prices for gasoline and electricity in the country.

This dependency on imports is, in many ways, a legacy of Hawaii's colorful, controversial history, starting with the missionaries who came to the islands in the early 1800s. Their mission was to convert Hawaiians to Christianity, but they eventually became wealthy businessmen controlling huge tracts of land on which laborers toiled to produce sugarcane and pineapples for export. Today many of those plantations are idle, since sugarcane and pineapples can be produced more cheaply in Central America and elsewhere. The question—like the one faced by George Clooney's character in the movie The Descendants—is what to do with that land. The all-too-easy option is to turn it over to deep-pocketed developers eager to build more houses, resorts and shopping malls, which create more demand for food, energy and water.

A smarter approach would be to preserve the land for small farms, renewable energy projects and other ventures that can help make Hawaii more self sufficient and sustainable. I met many smart, committed and passionate people in Maui who are working towards those goals, from fellow TEDx speakers including Vincent Mina, an organic farmer and organizer, and Arthur Medeiros, a biologist working to restore Hawaiian ecosystems. Others, such as Dr. Pualani Kanaka'ole Kanahele and musician Paula Fuga, are at the forefront of a renewal of native Hawaiian culture and wisdom.

One challenge in creating a more robust local economy is capital: where does the funding come from? Here again, Hawaii is blessed with abundance: there is a lot of wealth on the islands. Yet much of it is invested on the mainland. That's why one of the most exciting initiatives underway is an effort to create a local stock exchange that would bring together Hawaiian investors and entrepreneurs. A local exchange would allow Hawaiians to keep more capital local, where it could be put to use funding homegrown companies that can lessen their dependence on imports—companies such as Pacific BioDiesel, which makes biofuel from local restaurant refuse (and powered the Jetta I rented from Maui's;Bio-Beetle), and the HaliiMaille Pineapple Co., a newly formed, locally owned venture that grows pineapples for the local market.  

A legislative working group recently concluded a several-month study on the viability of a Hawaii stock exchange. The working group has given a green light to the Friends of Hawaii Local Stock Exchange to create an "alternative trading system" for accredited investors (people with a net worth of $1 million or more, not including primary residence, or over $250,000 in annual income for each of the prior three years). Of course, the real value in a local exchange is when everyone, rich or poor, is able to have a stake in the local economy and be part of its growth. And that's the ultimate goal for the Friends of Hawaii Stock Exchange. But many regulators are wary of local exchanges and other new funding platforms and want to see them tested in a low risk environment first.

The old Honolulu Stock Exchange

Ironically, the concept is not new: Hawaii, like dozens of regions  across the country, had its own stock exchange for decades. The Honolulu Stock Exchange was instrumental in establishing the local economy and infrastructure, financing companies including Maui Telephone, the Bank of Hawaii, and Honolulu Rapid Transit Co. before it closed its doors in 1977 amid financial market consolidation.

As one of the most geographically isolated places on earth, Hawaii may be an extreme example. But in this age of globalization, climate change and scarcity, many communities across the country, and indeed the world, can relate to the need to become more self sufficient, to keep more capital local, and to rebuild their local economies. If Hawaii can do it, we all can. And I'm rooting for Hawaii.