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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.

In Innov8Social’s earlier post, “What is Crowdfunding”, we talked about the concept of raising funds through smaller investments or donations as a capital-raising option for a start-up or social enterprise—and limitations to crowdfunding investment due to securities laws.

That post also outlined the efforts to pass new legislation that would establish crowdfunding mechanisms to support small business, create jobs, and pave new pathways for innovation.
The House of Representatives took on crowdfunding in November

In November 2011, the House took on crowdfunding via the Entrepreneur Access to Capital Act (H.R. 2930) which passed 407-17. You can read the full post about the House’s bill and its key features here.

Now, it is the U.S. Senate’s turn
Last Friday, on December 2nd 2011, the United States Senate introduced its version of a crowdfunding initiative to the floor. Key features of the Senate bill include:
  • entrepreneurs could raise up to $1M from unlimited number of unaccredited investors (without registering with the Securities and Exchange Commission)
  • entrepreneurs seeking to raise capital through crowdfunding must do so through a website and must disclose risks to investors
  • entrepreneurs must incorporate as a business according the applicable state law and must file with the SEC
  • individual investors could invest up to $1000
Unlike the Senate Bill, the House bill enabled a $2M capital raise through crowdfunding. It also specified that individual investors could invest up to $10,000 (or 10% of their income).
The ultimate balancing act: supporting innovation and minimizing risk
While there has been bipartisan support for ushering in new securities provisions to encourage innovation, investment by unaccredited (i.e. non-wealthy) investors, and spur local job creation—there is also concern that we are moving to fast towards a future that can create new kinds of risk for new kinds of investors.

One group voicing their hesitation is the North American Securities Administrators Association. It fears that legislated crowdfunding measures could lead to speculative investment that could be risky to new or small-fund investors.

Read More:
As we discussed in the post “What is Crowdfunding?”, there is a new crowdfunding bill making its way through Capitol Hill that aims to establish an SEC exemption for small investments to provide early capital to small businesses and start-ups.A Quick Look at the Entrepreneur Access to Capital ActThe bill, titled the Entrepreneur Access to Capital Act (H.R. 2930) would let small businesses use crowdfunding mechanisms to:

  • sell unregistered securities up to a total of $2M; and
  • would let investors individually invest up to a total of $10K (or 10% of their income) using crowdfunding
The UpdateThis week has been a big one for SEC reform. As reported by Portfolio.com, on November 2nd, 2011 the House passed Regulation A reform. Specifically the bill (Small Company Capital Formation Act) upped the amount of non-SEC registered stock that small companies could offer to the public from $5M to $50M.And on November 3rd, 2011 — the House made history by progressing the Entrepreneurship Access to Capital Act with its vote of 407-17.

What’s Next

The crowdfunding bill will make its way to the U.S. Senate for vote. If the overwhelming support in the House and President Obama’s endorsement of both bills are any prediction, it seems like SEC reform that could support social entrepreneurs may become law in the near future.

Quarter and PennyWhen you are contemplating how to fund a new social venture, the idea of reaching out to individuals to make small contributions may seem like a good option in addition to trying to secure funding from impact investing firms or established investors.If that describes your view on raising capital, you may already have a better idea of what crowdfunding is than you realize.

What is crowdfunding?

 

Crowdfunding is the process of raising capital through soliciting small contributions from a broad group of people.

As the arena grows, there are 2 main headlining flavors of crowdfunding:

1. Crowdfunding for Donations. A number of websites have successfully created a platform for crowdfunding on a donation basis. For example, KickStarter, IndieGoGo, RocketHub are established platforms allowing individuals to make donations to fund small projects. Similar new platforms in the space focus on niche areas such as making a donation for civic projects (CivicSponsor) or funding conscious media (LoudSauce).

2. Crowdfunding for Investment. Start-ups and small businesses may seek to raise capital using crowdfunding in addition to or in lieu of contacting investment firms or accredited investors. There are a number of laws surrounding such transactions and start-ups are advised to contact an attorney to make sure that there’s no breach in securities law.

What current law says about crowdfunding for investment

Set up a website, create profiles for social ventures, set out terms of the small investments and returns, let individuals small amounts in social start-ups, and you’re set to crowdfund investment, right? Wrong.

The Securities and Exchange Commission (SEC) has strict rules around who can invest in small businesses and start-ups. On the whole, small private businesses seeking funding are required to register securities with state and federal governments—a process that can be pricey and time-consuming.

As a result, small private businesses tend to solicit “accredited investors”, wealthy investors, who can more easily invest in private start-ups. There a few ways to try to steer clear of compliance issues, as were outlined at the Green Business Academy.

 

Crowdfunding petition submitted to SEC

To facilitate crowdfunding for investment, a petition for rulemaking was submitted to the SEC in July 2010 (see petition PDF) by the Sustainable Economies Law Center. The petition sought to:

  • create new exemption for securities offerings up to $100,000, with a limit of $100 per investor
  • exempt securities offerings up to $100 from Section 5 registration and from the extensive requirements imposed on exempt private and small offerings

New crowdfunding law proposed, the Entrepreneur Access to Capital Act

The actual legislation created, titled H.R. 2930 and dubbed the “Entrepreneur Access to Capital Act” (see full text here) includes the following provisions:
  • creates new exemption for annual aggregate individual investments of up to lesser of: (1) $10,000; and (2) 10% of investor’s annual income.

Obama White House in Support

The Obama administration has expressed support for the Act in Statement of Administration Policy issued November 2nd 2011 (read official statement here):

“In the President’s September 8th Address to a Joint Session of Congress on jobs and the economy, he called for cutting away the red tape that prevents many rapidly growing startup companies from raising needed capital, including through a “crowdfunding” exemption from the requirement to register public securities offerings with the Securities and Exchange Commission.”

The legislation recently cleared The House Financial Services committee, and is due for a vote in the House floor later this week.