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Direct Public Offerings (DPO) – Upsides, Risks, and Use Cases

Internet crowdfunding & DPO - raising funds from individual investors online
The Direct Public Offering  (aka investment crowdfunding) is a fascinating concept and unique way for certain businesses to raise funds.For example, it is increasingly being championed by small businesses and social enterprises, which aren’t always ideal candidates for traditional funding such as venture capital and loans.But, what are the risks of DPO’s? The upsides? And which companies have actually gone the DPO route?

In an effort to curate and organize published content related to DPO’s, we have taken excerpts from a broad range of articles on DPO’s and arranged by topic to help social entrepreneurs research this intriguing and growing funding option.

Definitions

From “What is a Direct Public Offering a.k.a. Investment Crowdfunding? (Cutting Edge Capital)

Direct Public Offering (DPO) (also known as Investment Crowdfunding) is a generic term that includes any offer and sale of an investment opportunity to the public in which anyone (both wealthy and non-wealthy) can invest. Also, the entity that is raising the funds offers the investment directly, without a middleman like an investment bank.



From “What is a Direct Public Offering? Going Public Attorneys” (Securitieslawyer101.com)

A Direct Public Offering allows a company to sell its shares directly to investors without the use of an underwriter. With a Direct Public Offering, the company files a registration statement with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”).

Typically, in going public transaction Form S-1 (”S-1”) registration statements are used.

From “Social Enterprises Raise Money Through Direct Public Offerings” (Forbes, 8/6/2014)

Andy Bamber, Cutting Edge Capital’s business development manager, calls [Direct Public Offerings] “securities-based crowdfunding.” Through DPOs, companies sell securities directly to a lot of unaccredited investors. It’s a way to raise capital without all the regulations, underwriting and expense required for a regular IPO. In some cases, there’s a cap of $1 million; in others, there’s no cap.

From “Social Enterprises Raise Money Through Direct Public Offerings” (Forbes, 8/6/2014)

While they’ve been around for a long time, DPOs have flown largely under the radar—until now. One reason could relate to the JOBS Act. Although DPOs aren’t regulated by that legislation, the pace of the law’s implementation could be one factor in the stepped-up interest. “I think DPOs are getting a boost from the continued regulatory delays of investment crowdfunding,” says Amy Cortese, author of Locavesting: The Revolution in Local Investing and an authority on the subject of local investing. “It’s a form of crowdfunding that’s legal today.”

This is good news for social enterprises, because DPOs are useful for ventures “with a strong following or appealing social mission,” says Cortese. (That includes businesses that are of interest to investors and consumers looking to support local ventures, as well as many social enterprises).

From “Entrepreneurs- Have You Considered Direct Public Offerings To Raise Capital?” (Return on Change, 1/29/2014)

DPOs allow community members to invest in local business, allowing public offerings of securities (stock, notes, or any other kind of investment) to all investors, wealthy or not.

DPOs are different from IPOs in that they allow business owners to sell stock directly to the public without the registration and reporting requirements of an IPO. However, they must be filed with the individual states and are screened by state-level securities regulators who have a great deal of experience at spotting fraud and overly risky propositions. That is a big advantage over the JOBS Act, which prohibits state securities regulators from getting involved. Vetting by such regulators reduces the need for onerous limits like those imposed under the JOBS Act.

Generally, DPOs do not require audited or reviewed financials, caps on total amount raised or individual investments, ongoing reporting or limitations on communications. There are maximum limits on the amount that can be raised, usually up to $1 million, but this can be flexible.

A major feature of DPOs is that business owners are permitted to advertise and promote to potential investors. There is a downside. DPOs stocks can be harder to sell when investors are ready. This can be a deterrent for investors.

From “Direct Public Offering (DPO): Expanding Your Team of Stakeholders” (California Bank & Trust)

Here’s the process for the creation of a DPO – an ideal capital development tool for many growing businesses:

  • Stock is registered with state administrators instead of with the Securities and Exchange Commission (SEC).
  • The company generates a prospectus that clearly lays out company financials, fiscal history and reasonable projections for further growth. There are regulations that must be followed in the preparation of a DPO prospectus, so hiring legal counsel to help develop your DPO prospectus is just plain smart business.
  • The company makes financial reports and documents publicly available.
  • The company provides accurate and timely information about the business to investor-shareholders, usually on a quarterly basis.
  • The company is audited by an accredited, independent accounting firm, which means your books must be current, clear and down to the penny so auditors give your business the “thumbs up.”

Types of Direct Public Offerings

A DPO falls into one of three regulatory classes:

  • Regulation D: The most widely known form of DPO, a Regulation D, also called a Small Corporate Offering Registration (SCOR), equips you to raise up to one million dollars every 12 months. Shares are registered with your state’s securities regulatory administration.
  • Regulation A: Enables your company to raise up to five million dollars annually. However, a Reg A DPO requires registration with the Securities and Exchange Commission’s Small Business Office. This increases the costs of compliance and reporting. In addition, it adds another agency looking over your shoulder every 90 days.
  • Intrastate DPO: This class of DPO isn’t capped on allowable sale of stock but you must raise funds within your state, be incorporated in that state and do at least 80% of your business in that state, hence the term “intrastate” DPO.
  • This type of DPO is ideal for growing businesses with a clearly-defined, regional service area. Planning on going global? An intrastate DPO is not the way to grow.

The Upside

From “Direct Public Offering (DPO): Expanding Your Team of Stakeholders” (California Bank & Trust)

  • Stock sales raise capital you are not required to pay back, as you would a commercial loan. Investors accept and share both risk and reward generated by your business.
  • Because DPO investment capital isn’t a loan, you don’t make interest or principal payments on the funds you receive. Investors grow wealth through appreciation of share price.
  • Selling shares of stock through a DPO won’t require your company to give up as much equity as it would using venture capital (VC) investors. A DPO keeps greater control of the company in your team’s hands.
  • Marketing shares of stock simultaneously “sells” your company brand to customers, clients, vendors, contractors, subs, suppliers and others with whom you conduct business regularly.
  • Since the legal and accounting requirements for a DPO are relatively simple, a DPO measures investor interest – a critical metric when you decide to take the company public.
  • Employees, customers and suppliers who purchase an ownership stake in the company have a vested interest in seeing your company succeed. You expand the team outside the four walls of your facility.
  • Capital loans are easier to obtain when lenders recognize that investors participate in risks faced by the company. This enables you to leverage the good name of your business to raise more capital at better rates and terms.

 

The Risks

From “Seeking Capital, Some Companies Turn to ‘Do-It-Yourself I.P.O.’s’” (New York Times, 7/31/2013)

On the downside, business owners must be prepared to invest a substantial amount of time and effort in the process and to deal with hundreds or even thousands of small investors. And most direct offerings require assistance from a knowledgeable lawyer. Not surprisingly, however, cutting out the middleman and streamlining the process lowers the cost considerably. A direct offering might cost around $25,000 in legal fees, while a formal initial public offering can cost $1 million or more. That makes direct offerings an increasingly attractive option for companies that need a substantial amount of capital — typically between $500,000 and $5 million — but not enough to justify the cost of an initial public offering.

From “An IPO route for the little guy, but full of risks” (CNBC, 12/4/2014)

“Almost 100 percent of entrepreneurs grossly underestimate how tough it is to get financing from third-party investors, even when they’re selling shares,” said Voskuil, adding, “Where do you find investors willing to put $10,000 or $25,000 of capital into your company without the help of a financial professional’s access to deal flow?”

Voskuil said any company pursuing a DPO on its own that reaches even one-third of its target amount is doing well.

This year, Cutting Edge Capital has worked with more than 40 companies to launch DPOs, and it expects to double that number in 2015. It doesn’t come cheap, though: Cutting Edge Capital charges $14,000 for its DPO boot camp.

 
From “The Ups and Downs of Internet Direct Public Offerings” (Virtual Advisor, 2000)

The Downsides of Internet DPOs

According to Brad Sinrod, president and chief executive of Philadelphia-based IPO.com, DPOs are often not all that they’re cracked up to be. In Sinrod’s experience, he has found that many early-stage growth companies are not ready for the scrutiny of a public offering, let alone the responsibilities that go along with conducting a DPO. “An entrepreneur may do a good job of building their business, but may not be able to play the role of securities lawyer, investment banker, stockbroker and investor relations professional — all of whom you’d normally include in a full-blown public offering,” Sinrod explains. In fact, Sinrod, whose company reports on the IPO market, says a small- to mid-sized firm should rely on sources like friends and family for start-up funding.

If firms do undertake a “do it yourself” DPO, Sinrod advises working with professionals who will truly assist in the offering process. “[Not only do they] bring experience to the table, but investors are much more comfortable when professionals are involved,” he says. “Investors feel that there are actually professionals involved who have done some due diligence – because an investment bank or a broker/dealer needs to do due diligence and take liability for the companies they raise money for. There’s also a better chance that the stock will be priced at fair market value. We’ve seen a lot of entrepreneurs who think their garage-based business is worth $100 million, and they may be correct, but they need to go through the normal process to determine the true value of the company.”

Sinrod adds that one primary reason that companies go public is to possess a publicly traded security that provides liquidity for investors and a potential exit strategy for investors. “Unless a company is working with professionals with experience in the process, it’s not an easy task to accomplish,” he advises. “There have been a few companies that have done DPOs with some success, but any company that can find an investment bank should.”

 

Use Cases

 

From “Can a DPO grow your business like Ben & Jerry’s?” (Greenbiz, 6/16/2014)

Ben & Jerry’s, Annie’s Homegrown and Real Goods are examples of social enterprises that have used DPOs to raise capital.

So far, Cutting Edge has completed 10 DPOs, raising nearly $5 million, with 20 or more in the pipeline. Arroyo Food Co-op, Calvert Foundation, Farm Fresh to You, People’s Community Market and RSF Social Finance are among those that have listed DPOs there.

Right now, the platform is only available to California residents and the minimum investment is $1,000.

 

Most famously, in 1984, two young entrepreneurs raised a first round of capital for their fledgling ice cream company in an intrastate offering. With the slogan “Get a scoop of the action,” Ben & Jerry’s raised $750,000 from 1,800 ice-cream-loving Vermonters, allowing them to build a new plant and expand, and setting the stage for a $5.8 million initial offering the following year.

Annie’s Homegrown, the maker of packaged macaroni and cheese, raised $3 million in 1996 through a direct offering, advertising the offering in coupons tucked into each box. And more recently, tight credit markets and the rise of social media have fueled interest in the alternative financing system, especially among companies that have enthusiastic customers who can be converted into shareholders.

 

From “Social Enterprises Raise Money Through Direct Public Offerings” (Forbes, 8/6/2014)

Consider Cutting Edge Capital. Launched four years ago, the Oakland, CA,-based company is really hitting its stride. It has facilitated 11 DPOs, raising just over $5 million–with 25 in the pipeline.

People’s Community Market, for example, which is trying to build a full-service grocery store in Oakland, raised $1.2 million in a DPO in 2013. (The offering is still open, though the enterprise isn’t doing any more active outreach, according to Brahm Ahmadi, CEO and president). Because it had already been trying to get established for a number of years, “A lot of people knew us and what we were doing,” says Ahmadi. “A DPO seemed like a good fit.”

As an example, Arroyo Food Co-op, a startup cooperative grocery store in California, is using a DPO to raise money from its community to open. The co-op is offering loans that pay a competitive rate of return. Because Arroyo registered the offering with the California securities regulators, there is no cap on the amount it can accept from each investor and it was not required to provide audited or reviewed financials. Arroyo currently has 660 members and has raised $200,000 in member-owned loans. Other successful examples include People’s Community Market, Real Pickles, and Quimper Mercantile.

From “Direct Public Offerings: Allowing the Community to Invest” (Triple Pundit, 1/22/2013)

Another company working with Cutting Edge Capital to raise capital through a DPO is Farm Fresh To You. Farm Fresh To You, a Bay Area produce home delivery service and also a farm, sought capital through accredited investors as well. They found about $1M over five years but wanted to find a way to include their customers in their financial development. Yet 99 percent of their customers were non-accredited investors. They asked their lawyers how to get their customers involved and they shrugged their shoulders. In came the support from Cutting Edge Capital and in five months, Farm Fresh To You’s Marketing and Sales Manager, Noah Barnes and Jenny Kassan set up a DPO. According to Barnes, “It was a win-win. They get better than market rate on their investment and they can get more fresh produce from us.” Farm Fresh To You can even pay the interest back with produce credits through their Green Loan Program.

From “Raising Cash via Direct Public Offering” (Entrepreneurship.org, 2006)

Adamis could have gone the venture capital route. But venture capitalists pay less per share in return for the five-to-eight years they typically wait for potential return on a high-risk investment. That, in turn, would have required us to sell many more shares to get the money we need.

In the past year, this environment has led many companies, including Adamis, to explore various financing options known as alternative public offerings (APOs), such as reverse mergers. In a reverse merger scenario, we would acquire a public shell, e.g., a publicly traded company that is no longer a functioning business. This would save time and effort to register with the U.S. Securities Exchange Commission (SEC) and deliver a shareholder base and publicly tradable stock.

However, public shells are quite expensive. In addition to legal and accounting fees, people who control a “clean shell” with few liabilities generally demand ownership of five to ten percent of outstanding shares plus cash ranging from $250,000 to $750,000.

Based on our “make-versus-buy” analysis, we chose to raise public money by creating our own shell through direct registration (also known as a direct public offering) with the SEC.

Notes from Pitching for Good: Understanding Your Funding Model, a Stanford PACS Event

Stanford Center for Philanthropy and Civil Society (PACS) hosted a thoughtful discussion last week on funding avenues social entrepreneurs can pursue to support and grow their ventures.A panel of five speakers representing unique sectors shared perspectives on non-profit grants, impact investing, venture capitalist investing, program-related investments, and perspectives from being a social entrepreneur in the field.

The panel discussion was followed by a brief Q&A and then breakout groups to further discuss nuances of various funding models. Below are a few key points made by each speaker.
Stanford PACS Panel

Kim Meredith, Executive Director of PACS (moderator)

Kim welcomed guests and outlined four initiatives related to social innovation that the Center supports.  These include:
Stanford PACS program

 

4 Initiatives by PACS for Social Innovation:
Kim then introduced the panel made of diverse players and perspectives in the social impact field.

Jenny Shilling Stein, Co-Founder and Executive Director of the Draper Richards Kaplan Foundation.

Jenny provided insight on how her organization selects social innovators to receive funding from the Draper Richards Kaplan Foundation, which focuses on funding early-stage high-impact nonprofit organizations. She emphasized that her organization believes that great people make great change and that much of the evaluation has to do with the leader. Her team pays close attention to characteristics of the leader, past experience in leadership and management, and the ability to maintain great judgment, especially in challenging situations.
The Foundation also takes into account the impact of the model and how the social initiative will address deep needs.

Susan Phinney Silver, Program-Related Investment Officer at the David and Lucille Packard Foundation.

Susan provided a unique perspective on program-related investment—a funding model that enables foundations to invest in philanthropic projects where the return on investment is not the primary outcome sought. She highlighted that although the space of social entrepreneur investment may feel fairly new,  foundations such as the Packard Foundation have been engaging in PRI’s for the past 15 years.
She emphasized that it is key for a social innovator to study the areas of focus of various foundations. However compelling a new social venture may be, if it is not aligned with the goals and mission of the foundation, it could be a hard sell.
A few areas of focus of the Packard Foundation include land conservation, kids and education, climate change, and reproductive rights. She said her organization looks for a strong programmatic focus with on impact-related outcomes. She also mentioned that part of the assessment in granting a PRI is what the funding will mean for the venture and whether it has the potential of attracting other forms of funding as well.Innov8Social addressed program-related investment last year, in connection with the L3C legal structure aimed at streamlining the process of granting PRI’s.

Liz Rockett, Vice President of Imprint Capital.

Liz’s area of focus at Imprint Capital–an impact investment firm–is health practice and improvement of domestic healthcare.  She mentioned that she has noticed a trend in the five years the firm has been in existence. Namely, she has seen a rise in the number of private wealth looking to enter the impact investment market.
Also dubbed “patient capital” impact investment is a funding model that anticipates a modest rate of return as a social venture focuses on impact and scalability.

Michael Dorsey, Managing Partner at the Westley Group.

The Westley Group is a venture capital firm that specializes in investment in cleantech companies. Prior to his role at Westley, Dorsey was co-led the Bay Area Equity Fund that successfully funded cleantech ventures including Tesla, PowerLight, and SolarCity.
Michael reassured the audience that there is money available for driven, focused social innovators. He cited universities such as Stanford and Duke that have campaigned to raise billions of dollars on funding that can support interdisciplinary approaches to technology, impact, and innovation.
In answering how social innovators can raise funds, Michael emphasized the importance of matching the donor with the need—if there’s a real need—and an excellent team.

Sunita Mohanty, Business Development at Lumosity.

Sunita provided a perspective from the field. She shared her experience of being part of a social impact startup that did not proceed forward. She has since parlayed her skill set in finance, strategy, and education into a business development and strategic partnerships role at Lumosity—an online platform and app that leverages neuroscience to create games and exercises that improve core cognitive abilities.She noted that for a social venture, early stage funding can be a mixed blessing. While providing capital and stability it can also lead a startup to pursuing more angles of their venture instead of focusing on perfecting a main strategy. 

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BlendedProfit Lets You Hangout with Social Innovation Thought Leaders

BlendedProfit.com is a site focused on fostering the new economy, through posts on news and trends, and interviews with thought leaders in the field.In its series of live Google Hangout webinars, the site’s Chief Curator Brian Weinberg interviews various individuals at the forefront of profit and cause—to better understand the existing infrastructure and future of an economy blended with profit and purpose.

Today marks interview #14 and will be with Lisa Hall, President & CEO of the Calvert Foundation.
You can tune in to today’s GameChangers episode here. (8 PM EST/ 5 PM PST)
Innov8Social logo

 

BlendedProfit.com

 

 

Crowdfunding Bill Passes in U.S. Senate, 73-26

shift forwardThe U.S. Senate passed the CROWDFUND Act, a bill allowing average citizens the ability to invest modest amounts in emerging start-ups, by a vote of 73-26 this past Thursday this (3/22/12).We talked about this bill in earlier posts “What is Crowdfunding?“and “Crowdfunding Bill Goes to the U.S. Senate” on Innov8Social. Those posts outlined the concept of crowdfunding for investment, versus for donation (as online platforms such as Kickstarter successfully facilitate).Under existing law, the SEC only allows accredited investors to easily invest in start-ups. The U.S. House of Representatives passed a version of the crowdfunding bill in December 2011 and again in March 2012. The House’s version is named Jumpstart Our Business Startups–tidily referred to as the JOBS Act. And now the Senate has responded with passage of the CROWDFUND Act, which serves as an amendment to the JOBS Act.

A look at the CROWDFUND Act

Key features of the U.S. Senate’s CROWDFUND Act include:

  • Entrepreneurs can raise up to $1M annually through an SEC-registered crowdfunding portal.
  • Individuals earning less than $100K can invest the greater of $2K or 5% of their income. Those earning more than $100K can invest the greater of $100K or 10%.
  • Crowdfunding portals must provide investor protection, including investor education about risks related to small issuers and liquidity.

Crowdfunding for Investment, the Social Entrepreneur’s New Frontier

It is hard to even begin to assess the potential impact of citizen investment in emerging companies. And, for social innovators, it is an exciting new juncture. We have talked in the past about citizens’ abilities to ‘decide with their wallets’ through buying from socially responsible companies and outlining new policy an legislation that supports social entrepreneurs. This new turn enabling tangible investment in new companies only underscores this concept. It can make each of us impact investors, seeking both financial and social return on our small investments.

Social entrepreneurs, it’s time to get in the know about the specifics of this legislation and become poised to act if it passes and is signed into law by President Obama.

As they say, shift happens. And sometimes, we shift + forward.

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What Happens After a Successful Crowdfunding Campaign? Yellow Leaf Hammocks Q&A Follow-Up…

With crowdfunding sites gaining popularity as a way to fund ideas, you may find yourself wondering what happens after money is raised. Back in December 2011 we did a Q&A with the founder and CEO of social enterprise Yellow Leaf Hammocks, Joe Demin. At that time Yellow Leaf Hammocks was about three weeks into a Kickstarter campaign to raise $10,000 to build and manufacture a stand for the company’s sustainable hammocks.

Yellow Leaf Hammock logo

A Crowdfunding Story, Continued…

Having already raised the lion’s share of the ask, Joe and his team still had $3000 left to raise within 9 days. And, as explained in the Kickstarter rules, the entire amount would have to be raised for Yellow Leaf to have access to any of the raised funds.

The group’s hard work paid off. Yellow Leaf Hammocks was able to inspire a total of $11,400 worth of donations to fund their project on Kickstarter, and they did so with 90 backers and 4 days left on the clock. We caught up with Joe to find out about how they were able to garner the remaining the funds and to learn about what happens after money is successfully raised.

Yellow Leaf Hammocks Q&A Follow-Up with Joe Demin

Joe DeminQ | Innov8Social:  Joe, thanks for joining us again. And many congrats on the successful campaign! How was it raising the final $3K? Did you try any different techniques than earlier in the campaign to inspire support?

A | Joe Demin, Yellow Leaf Hammocks: Thanks so much! The homestretch was a little nerve-wracking at times, to be honest.

We had heard from a lot of people that donations tend to slow down in the middle of a campaign, then build momentum again during the final days—but we didn’t want to take that risk & come down to the wire!

Our outreach was pretty consistent over the course of the campaign, which was reflected in the fairly consistent pace of pledges. We continued to share daily facebook & twitter updates and e-mailed our supporters once or twice a week. We really liked using the Campaign Update function on Kickstarter to keep our donors & supporters fully in the loop.

Toward the end of the campaign, we were worried about overwhelming people with ongoing messages, so we tried to reach out on a more personalized basis. It’s human nature for some people to procrastinate—we ended up with people pledging at the very last minute! One huge pledge came in with less than two minutes left in the campaign!

Through the whole campaign, it was awesome to watch Kickstarter’s statistics and see how people found us—almost 1/3 of our donations came through the social networks (for example, people who saw the campaign in a friend’s facebook status). It was amazing to see that our fans were inspiring a whole new group of people to become involved!

Q | Innov8Social: So, what happened immediately after the funds were raised? And how did you & your team feel when you found out you had achieved to goal?

A | Joe : We were ecstatic when we hit $10,000! It was really gratifying and humbling to feel the support and excitement of this amazing community of backers. We posted the news through all our social networks and tried to just express our excitement and gratitude as we soaked in the news!At that point, we had 4 days left in the campaign, but a lot of people didn’t realize they could still pledge after the goal was reached. We did one last push to make sure people knew they could still get a hammock in time for Christmas & be a part of the campaign. That spurred another round of backers, so we ended up exceeding our goal by nearly 15%!Once the campaign officially closed, we immediately shipped out the first batch of Kickstarter rewards (the ones that were meant as holiday gifts), then took a nice relaxing break to celebrate over the holidays!Q | Innov8Social: You guys had set up some great rewards for donors. How has the process of following up with the rewards been?

A | Joe : It is definitely time-consuming! I think we underestimated the time it would take. It was a challenge to organize the process and there was a mad dash to get those initial rewards out in time for Christmas. We are continuing to work on fulfillment for a couple of the backer levels and we’re especially excited about getting these first stands manufactured and shipped out for spring!
That being said, putting these packages in the mail is one of my favorite things to do! We are so grateful to our backers and it’s nice to be able to express that gratitude in a meaningful way. I’ve personally hand- written a Thank You note to each person and we’ve sent them each a Polaroid from the Mlabri village.
We also worked with a designer to put together a ‘Rewards Suite’ of beautiful, unique gift cards and stationery, because we wanted it to be a really special experience when people opened up their rewards package.It meant a lot to us that people saw our vision and supported us and we wanted them to know we were truly thankful.
Q | Innov8Social:  Does Kickstarter do any follow-up after funds are raised? Do you have to complete any additional forms?

A | Joe : No. Before you start the project, you do all the necessary paperwork & get them your financial info. When the project closes, they transfer you the funds (minus their fee). They also send you an email with some broad tips to engage your backers as you move forward.When the deadline hits, your project page is immediately ‘retired’ from active duty- a notice goes up with the end date and final funding amount. People can still watch your video and you can continue to post updates as the project progresses, which is great.Q | Innov8Social: Finally, do you have any tips for social entrepreneurs on what to do (and what not to do)  after raising funds on a crowd sourcing platform?A | Joe : Things don’t slow down when the campaign closes. Once you are lucky enough to reach your goal, you have to immediately switch gears and begin delivering on your side of the pledge.

Plan ahead for rewards fulfillment and make sure that you continue to give your backers the best experience possible. A pledge on Kickstarter is more than a purchase on your website and people are really vested in your success. They’re genuinely excited to hear about how the project is going and it is awesome to continue to interact with them afterwards.

It is amazing to have this whole new community of people who share our vision. We’ve received really touching emails from people who love their rewards packages and we’re looking forward to staying in touch with everyone who was a part of this project. Update your supporters!
It can feel overwhelming to realize that you need to a) keep up with your day-to-day work b) manage your rewards fulfillment and c) actually build the project you funded! Just hold onto the excitement you felt when you launched your project and remember that now you have an awesome group of people cheering you on!
Many thanks once again to Joe and the Yellow Leaf Hammocks team. We can’t wait to see the new hammock stand prototypes!
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What to Know Before Launching a Crowdfunding Campaign, Q & A with Social Enterprise Yellow Leaf Hammocks

A Closer Look at a Kickstarter Crowdfunding Campaign for Social Enterprise

We have looked at crowdfunding through investment by following federal legislation that would make it easier for start-ups and small businesses to raise capital from non-accredited investors.

But what about crowdfunding through donation? How does it work, and what is it like to actually choose a crowdfunding platform and launch a crowdfunding campaign?

Meet Yellow Leaf Hammocks

We turned to a social enterprise that is learning about crowdfunding for donation first-hand. Yellow Leaf Hammocks is an innovative company that produces unique hammocks handwoven by artisan weavers using proprietary designs made of over 150,000 interwoven loops and spanning up to 4.5 miles of yarn. The weavers are members of an indigenous tribe in north Thailand who have been able to create economic and empowerment opportunities through their artistry.

Yellow Leaf Hammocks launched a Kickstarter campaign in mid-November 2011 to raise $10,000 to build and initiate manufacturing of a new Swiss-designed hammock stand prototype. They are 9 days and about $3K away from from their goal. You can see the video explaining the product and campaign below.

Then, see below for a Q&A with Yellow Leaf Hammocks founder Joe Demin on his company’s decision to launch a crowdfunding for donation campaign, their initial steps, and what they have learned through the process.

Yellow Leaf Hammocks Kickstarter Campaign

What to Know Before Launching a Crowdfunding Campaign: Q&A with Yellow Leaf Hammocks Founder Joe Demin

Q | Innov8Social: Thanks Joe for taking a few minutes with us and congratulations on the success of the Kickstarter campaign so far. As an initial question, how did you first decide that launching a crowdfunding campaign might be a good fit for your social enterprise?

A | Joe Demin, Yellow Leaf Hammocks: For a long time, we’d been kicking around the idea of a furniture product that supported our hammocks. The Sitting Hammock is relatively compact, so it is a great option for urban hammockers and people who want to be able to hammock indoors- except that there has not been a good stand out on the market.

We knew that designing and manufacturing a hammock stand would be a huge project to take on!

For a young boot-strapped company like ours, we have to carefully consider budget in everything we do. From the beginning, we have wanted to build this company independently to make sure that we can remain focused on our vision and not lose sight of our social mission.

Crowdfunding encompasses lot of the traditional steps to product development- its market research, product design, an investor pitch, a marketing campaign and pre-sales all in one exciting campaign- so it seemed like the perfect alternative to raising money from investors and taking on a huge risk!

By going directly to the public, we are assuring ourselves that there is going to be an audience for this cool new product we’ve designed and we feel more confident about jumping into manufacturing and pushing this out for the spring.

Q | Innov8Social:  How did you assess various crowdfunding platforms? And what were the deciding factors that ultimately led you to Kickstarter?

A | Joe : There is definitely a crowdfunding boom going on right now- you’re right, there are a lot of options and even niche platforms that target specific types of projects, like non-profits, music, etc.

For us, Kickstarter appealed most because it is the largest funding platform. We’ve learned that you can’t really count anyone out when it comes to hammocks- hammock fanatics come from all age ranges, industries and regions.

We appreciated the fact that they have a thorough vetting process, so there is not a lot of clutter to cut through- the projects on the site are inspiring and crazy and daring, but the people behind them know what they’re talking about.

I think some people can be intimidated by the “all or nothing” model on Kickstarter (if you don’t raise 100% of your goal, you don’t receive any funds). For us, this was absolutely the way to go. We wouldn’t want to have half the money to build out the prototype because it would be tough to deliver on the promises made to backers! Plus, it gives you a ton of motivation to set your goal carefully and then work like crazy to reach it!

Q | Innov8Social:  How was the process of setting up the campaign? What was the most challenging aspect? The most surprising?

A | Joe : The first thing we had to do was design the stand!! We worked with an amazing engineer, Bryce Gibson, to go through several rounds of designs and come up with the sleek, versatile design that is at the center of the campaign. It was a little bit like hammock-stand “Survivor,” with a group of friends and advisers weighing in and voting on each round of the designs.

The hardest part for us was creating the video- we had so much that we wanted to share, between our mission and our current products, before we even got to the stand itself!! We ended up with a really long video by Kickstarter standards- but we have gotten a ton of compliments on it and I think it’s been a huge help in terms of energizing people with the story and getting them excited about “Do Good. Relax.”

A big surprise was realizing that a lot of media want to cover something that’s already succeeding- so you are really on your own in terms of creating that initial momentum before media start to pick it up and spread the news! We also realized that there’s really no guarantee that Kickstarter itself is going to take an interest in your campaign. They can be really instrumental in sharing and highlighting specific projects within their vast community, but they haven’t shown much interest in our campaign. You never know what the considerations are behind the scenes for other people!

Q | Innov8Social: What are 3 things you would suggest to social entrepreneurs thinking about starting a crowdfunding for donation campaign online?

A | Joe :  A generous timeline and some groundwork are essential. I would already love to go back and give myself twice the time to prepare! I read a lot of articles (like this one!) about other people’s experiences and spent some time observing campaigns I admired. Sometimes it seems like all you hear about are the runaway successes that raise $100,000, but a lot of campaigns don’t work, so that was important to me. I wanted to understand why campaigns fail as well as why they succeed.

Creating rewards that excite and engage your backers is another key to success. The point of crowdfunding is that you aren’t simply asking for donations. You are creating an experience for people- they get to be a part of your mission and take home a tangible reminder of their support. At this time of year, we knew we were going to see a lot of holiday shopping traffic. Because a part of our mission is to spark creativity, we decided we wanted to offer our backers a chance to design their own hammock. But each of our rewards was designed to help recreate that feeling of “Do Good. Relax.” and engage people for the long-term. The most exciting reward, of course, is that you can be one of the first to receive a customized Sitting Hammock Stand!

Once you’ve outlined your project goal and the rewards you’re going to offer, it’s critical to have a solid launch. You need to have some built-in momentum before you click that “launch” button. We should have been more aggressive about our PR strategy in advance of the campaign, but we did a good job reaching out to our internal network and community. They backed us early and we hit $1000 within three hours of launching. I think there is a statistic that if you reach 20% of your goal within the first 4 days, your chance of a successful project is 90%- that’s how important your launch is.

Q | Innov8Social:  Finally, what are your hopes for this campaign. What do you hope to get, and to give?

A | Joe : We’ve got a little more than a week left and we are on track to hit our $10,000 goal! For me, that is the number one hope right now.

In the long term, I am excited to have introduced ourselves to so many new people this month. I know it’s a little insane to expect people to go crazy for hammocks in the middle of winter, but we really think that this stand can revolutionize the way people relax year-round.

I really can’t wait to start sending out the rewards! I think people are going to love what they receive in the mail. We’ve got cool things heading their way that will help them feel connected to our mission and our weavers and will help them relax at a really hectic time of year!

The feedback we’ve gotten and the growth of our community has just been amazing already. I’m glad we could share our experience and I hope I can help future social entrepreneurs succeed in their crowd- funding efforts!

Innov8Social:  A big thank you to Joe and Yellow Leaf Hammocks team for sharing their experience and insights. We look forward to following up after the campaign concludes on Sunday, December 18th 2011. You can help them reach their fundraising goals by donating here.

5 Ways Social Entrepreneurs Can Raise Money

Legal structure and funding for social entrepreneurs were key topics at the Green Startup Legal Discusson on Day 2 of the San Jose Green Business Academy, with attorneys addressing various aspects of legal set-up for startups. The panelists and topics included:

Glass with coins

Securities Law & Social Entrepreneur Funding
Before introducing key ways in which social entrepreneurs can raise funds, Attorney Jenny Kassan mentioned that current securities laws dictate with specificity how investors can and cannot be solicited.
(note: a security is a form of investment or ownership that can be assigned a value and be traded.)
Securities laws dictate that companies cannot offer or sell securities unless the securities have been registered with the Securities and Exchange Commission (SEC) and with applicable state commissions. And securities laws only allow sale of securities to accredited investors (i.e. those with net work over $1M or annual income over $200K)—unless one of the narrow exceptions apply. (Read more about this on socaltech.com)
Considering the rise of crowdfunding initiatives, a social entrepreneur startup may wonder—how can I raise money by tapping my friends, family, and the general public—who may not qualify as accredited investors?
5 Ways Social Entrepreneurs Can Raise Money
Attorney Kassan highlighted five ways of raising capital in her presentation. (You can also read more on cuttingedgecapital.com).(note: considering the specificity of securities laws, it is probably a good idea to work with your attorney to ensure you’re money-raising efforts are above board)

1. Try to avoid falling under purview of securities laws. For example, offer donations for a perk, lend money without interest, pre-sell product.

2. Form partnerships with local governments and non-profits. An example of this is Mandela Foods in Oakland partnered with a local non-profit to raise funds. Enables joint application for certain grants.

3. Structure the business as a co-op. Most states have certain exemptions for cooperatives, including exemption from securities registration requirements.

 (note: see Namaste Solar co-founder talk about what it is like to be a co-op here)

4. Do a direct private offering, but have a different audience. This could involve offering an investment without public advertising, or raising capital from unaccredited investors using state exemptions.

5. Do a direct public offering. Do full securities law compliance–like IPO but there is no intermediary. This method may enable entrepreneurs to seek funding from broader base of investors.

3 Ways Investors Fund Social Entrepreneur Startups

At the Green Startup Legal Discussion on Day 2 of the San Jose Green Business Academy, the attorney panelists covered important legal issues for social entrepreneurs. Topics included approaches to legal structure, options for incorporation, and funding.

Green dollar bill

Attorneys from Starter Law, a law practice focused on helping entrepreneurs launch and grow their businesses, outlined a few common ways investors fund start-ups. Below are overviews of the funding methods along with notes from the panelists.
3 Ways Investors Fund Social Entrepreneur Startups

1. Convertible notes.  Also known as convertible debt, this is money an early-stage start-up raises in the form of a loan. It usually “converts” to equity (i.e. shares) sometime in the future with a discount (so that the angel investor often pays 15-30% less than the sticker price on each share). Depending on the provisions of the convertible note, the debt may automatically convert to equity when the start-up receives its next round of funding. This arrangement may feature a maximum price per share the angel investor will be required to pay if the convertible debt automatically converts to equity.

Notes from the panel: Convertible notes are inexpensive to set up and do not generally require very complex agreements. They are fairly flexible. Notably, investors are not equity-holders, they are creditors (which only convert to equity by provisions of the note).

2. Preferred Stock Financing. As the name suggests, preferred stocks enjoy preferential treatment over common stock. Startup companies issue preferred stocks to investors, giving the company needed financing and giving the investor valuable stake in the company. Preferred stocks are generally valued higher than common stocks, in scenarios of liquidation or acquisition preferred stocks are paid out first, and preferred stocks often include voting and anti-dilution provisions.

 Notes from the panel: This method of funding gives investors equity in the company, a seat on the board of directors, and all the bells and whistles that come with preferred stock. One type of preferred stock financing is Series A.*

3. Series Seed Financing. Similar to preferred stock financing, investors receive preferred stock in exchange for investing in the startup. Series seed financing generally refers to simplified version of preferred stock financing, which streamlines & expedites the purchase of preferred stock by seed capital investors. This mode of financing may not include some of the protective provisions valuable to social entrepreneurs and impact investors.

Notes from the panel: This financing model is not as complex as Series A and gives some, but not all, of the rights as Series A.

*This post has been edited to accurately capture the points made by panelists. 

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5 SF Bay Area Funding Resources for Social Entrepreneurs [Green Business Academy]

Green for All‘s Capital Access Program recently convened a two-day event focused on serving social entrepreneurs. The event, titled the Green Business Academy, was held September 29th-30th 2011, was a no-cost event, and took place at the University of Phoenix campus in San Jose, California—located in the vicinity of two of Silicon Valley’s noted tech & innovation pillars, Cisco and eBay.The Green Business Academy gathered green business leaders, socially responsible (impact) investors, legal experts, and support institutions providing local resources including legal services and mentorship necessary to build a social enterprise.Green Business Academy Day 2: Impact Investor Panel

Green Business Academy impact investors panel

Day 2 of the Green Business Academy in San Jose kicked off with a panel of impact investment firms discussing types of funding resources available to local SF Bay Area social entrepreneurs and how to go about pursuing them.

The panelists included:


5 SF Bay Area Resources for Social Entrepreneurs

The panelists largely spoke about their organization’s focus and resources. Below are key points about each of the 5 local resources introduced.

1. Opportunity Fund (@OpportunityFund) is a non-profit organization that supports local entrepreneurship by providing small business loans to maintain and grow companies. It has lent more than $17M to small businesses throughout California.

Panelist Alex Dang mentioned that Opportunity Funds has primarily served 2 types of green businesses: 1) smaller businesses that have had to go green because of regulatory requirements, and which have in turn formed marketing opportunity with new green business models; and 2) businesses that have chosen to source products sustainability.

You can read about Opportunity Fund success stories from their clients.

2. Hub Ventures (@Hubventures) is a 12-week program providing funding and guidance to Bay area social entrepreneurs, based in Hub SoMa and Hub Berkeley. Participants refine business models and investor pitches and build broader networks through weekly sessions, and compete for $75K in seed funding, as decided by their peers.

Panelist Wes Selke mentioned that Hub Ventures is raising $3M in funding to expand the program.

You can browse through the recent cohort of social entrepreneurs from the last Hub Ventures session.

3. Toniic is an angel investor currently comprised of 30 investors in 5 countries, with 3 global chapters, and is growing. Toniic has placed 18 investments with other $3M over last year.

Investors are interested in funding “tranformational enterprises”–that seek to do well by doing good. Toniic funds social ventures across the globe addressing issues such as poverty and climate change.

You can view selected investments by Toniic.

4. Investor’s Circle (@InvestorsCircle) invests in early-stage social start-ups and works to grow its base of “patient capital” investors. Patient capital investors prioritize external rates of return and optimize internal rates of return. Investor’s Circle hosts 2 social venture fairs per year where entrepreneurs and investors meet to discuss potential investment.

You can read about recent presenters at Investor Circle venture fairs.

5. GreenVC (@GreenEconomy) aggregates news and resources on green venture capital, funding, and startups. It is a go-to place to learn about green incubator programs, green funding resources, upcoming events for social entrepreneurs, and registration discounts.

Impact Investing Is Not Just About Money, SOCAP11 Explains

SOCAP11 logoThe 2011 Social Capital Markets Conference (SOCAP11) parsed out a number of issues surrounding social capital and clarified an important point. Impact investing is not just about money.In an insightful panel discussion, “Investing With Impact: A Partnership-Based Approach to Social and Environmental Innovation” moderated by Jeff Hamaoui, Founder and President of the Cazneau Group, representatives from 3 sectors–non-profit, government, and financial–talked about what brought them together to support a social capital initiative in Brazil and how building partnerships is a key component of impact investing.A few memorable quotes from moderator Jeff Hamaoui set the scene for the session:

“Collaboration is the process, innovation is the product.”

“Social technologies effectively bring people together to co-invest successfully & innovate together.”

“Opportunity leads, design follows.”

The Partnership Mindset

The session traced the path of how 3 distinct sectors could align on the same initiative. Hamaoui framed the discussion with the concept of the “partnership mindset”, i.e. social entrepreneurs looking beyond only a monetary ask when approaching investors, and engaging in multiple value conversations, marketplaces, and landscapes…that could in turn lead to capital investment.

So, what does that mean?


Luckily, to break down the concept of “partnership mindset”, Hamaoui outlined the 4 types of commodities (i.e. the 4 C’s) that can be traded by social entrepreneurs, investors, government, non-profits, thought-leaders, banks, etc.

4 Commodities Exchanged Under the Partnership Mindset

1. Capital is monetary investment, and is often the primary commodity sought.
2. Capacity is the ability to do something on the ground such as product design, product delivery, product assessment. Groups that are familiar with an area, region, or community may be able to offer capacity commodity to another group.
3. Credibility is name/brand recognition that can lend expertise or experience. This could be helpful in building networks, getting meetings with decision-makers, and building a presence in a new region or field.
4. Creativity is the out-of-the-box solutions that can result from connecting with another group in the same space/geography and leveraging each group’s experience and resources.

Key Points from Each Panelist

The 3 panelists were dynamic and enthused to tell the story of Imago, the joint project aimed to address 2 business challenges in Brazil: consumer financial education and packaging and recycling.

Lala Faiz, Partnerships Advisor in the U.S. Secretary of State’s Office of Global Partnership Initiatives (government)

  • one of the Secretary of State’s new initiatives is investing with impact, and the office sought to create a new partnership in Brazil to unlock opportunities for business and society
  • identified 2 targeted business challenges which had high market demand, for which there was a sizeable market opportunity, and which would yield significant social and environmental impact
  • but they needed partners to both invest in the initiative and provide intellectual capital through capacity-building, credibility, and creativity to create sustainable market-based solution

Cameron Peake, Mercy Corps Social Innovations Officer (non-profit)

  • social investment is a critical catalyst to longer term sustainable social change
  • mitigating risk, and seeding longer term commercial opportunities that can impact society …that’s why they (as a non-profit) got involved and provided seed funding for new ideas (innovation)
  • Mercy Corps was able to offer capacity, credibility, and capital via global best practices, knowledge of needs on the ground, and use of strategic subsidy

Michelle ViegasOffice of Outreach & Partnerships at Inter-American Development Bank (financial)

  • did not provide funding, but did provide intellectual capital and credibility via contacts (banks, investors, VC/private investors, govt, corporations)