🔒Crowdsource funding grows as path to capital for new startups

Cody McCormack always dreamed of opening his own brewery.

With the growth and popularity of craft beers over the past decade, McCormack saw an opportunity but was also looking to differentiate his business.

“I wanted to do something unique,” said McCormack, 29, “so we [are opening] a combined café and brewery.”

WeHa Brewing & Roasting Co. — slated to open in early summer in the Elmwood section of West Hartford — will include a tap room, private event space and roasting room with artisanal coffee. But McCormack’s hybrid model is not the only thing that’s different about his business; his approach to raising startup capital through crowdsource funding is, too.

Crowdsource funding — the practice of funding a venture or project by raising small amounts of money online from a larger group of people — has existed for more than a decade.

Platforms like Indiegogo, GoFundMe and Kickstarter have been used for everything from charitable support to independent movie productions to paying a family’s medical bills. But increasingly, startup entrepreneurs like McCormack — who may face greater challenges in securing loans from traditional financial institutions — are turning to their local communities for venture capital.

Overall, according to forecasts from Research and Markets, the crowdsource market — including business ventures — is expected to grow annually by 16% between 2021 and 2026, tripling the current number of crowdsource campaigns.

The need has been exacerbated by COVID-19, says Kristen Gorski, economic development coordinator for the town of West Hartford. The past year has been particularly challenging for startups, she says, because they often don’t have experience or sufficient credit, so lenders view them differently; additionally, federal COVID relief funds through the Paycheck Protection Program (PPP) have been more targeted toward keeping established businesses afloat.

“Looking to start a business requires a significant amount of investment and build out,” Gorski said, “and that’s really challenging, especially to finance.”

Capital stack

In McCormack’s case, he and his business partner, Robbie Wendenborn, set a crowdsource goal of $75,000 and gave themselves 90 days to complete the campaign, which was managed as a revenue-sharing campaign by Mainvest, a Salem, Mass.-based third-party vendor that specializes in crowdsource funding for businesses.

The crowdsource funds, McCormack says, were used to purchase brewing equipment, furniture, fixtures and café equipment. In exchange, McCormack is promising his investors — who, on average, contributed $1,000 — a 50% return paid over six years.

In total, WeHa Brewing & Roasting’s campaign exceeded its goal, raising nearly $90,000 from more than 100 investors. McCormack says he may end up paying more through a crowdsource revenue-sharing agreement than he likely would have under a traditional loan, but he sees a value in having community buy-in.

He estimated roughly 90% of his crowdsource supporters live in Connecticut, which he hopes creates a customer base with a vested interest in his business’ success.

“It’s an added benefit [of crowdsource funding] to be able to gauge [community] interest and get feedback.”

Another advantage, says Kaylin Kuza, a business success manager with Mainvest, is the flexibility that crowdsource funding provides. The quarterly repayment schedules, which companies like Mainvest track and manage for clients, depend on the business revenue, and can fluctuate in size based on the quarter’s bottom line.

“There’s no set repayment like a bank loan, and that’s a big advantage,” she said.

Mainvest was founded in 2018 and is one of a handful of crowdsourcing companies that allows revenue sharing as a debt instrument. As part of its suite of services, Mainvest registers its clients with the U.S. Securities & Exchange Commission, a requirement of all businesses that run revenue-sharing crowdsource campaigns, tracks revenue and repayments to investors and promotes their clientele to investors and the community.

Kuza says typical crowdsource campaigns range from $10,000 to $250,000, at which point more stringent regulatory requirements apply.

Crowdsource funding, she says, is typically a component of a startup’s capital strategy, but rarely provides all the capital required.

“Usually, it’s in conjunction with a bank loan, personal funds or private [equity],” Kuza said.

In its first two years, Mainvest has helped more than 150 companies — including some small businesses looking to expand — to crowdfund.

Gregg Lallier, chair of the emerging companies and venture capital practice group at Hartford law firm Updike, Kelly & Spellacy P.C., says crowdsource funding will likely continue to grow, especially among the younger generation of entrepreneurs who are, in general, more comfortable with online portals and having several non-accredited — or non-vetted — investors whom they do not know.

That creates an opportunity for both the startup owners and small investors, Lallier said.

“Crowdsource funding allows [a non-accredited investor] to invest as little as $100 and provides a market opportunity for people who aren’t necessarily high net worth individuals to invest in startups,” he said, noting that by outsourcing the administration of the crowdsource campaign to a third party, entrepreneurs can focus less on the capital raise and more on getting the business up and running.

Added perks

That’s something Tomas Nenortas understands. As the CEO of Moxi on the Rocks, a new East Hartford-based alcohol distillery and retail shop slated to open in 2022, Nenortas is planning to redevelop the Burnside Mill complex on Church Street.

He estimates the total project, which includes restoring the distillery’s hydropower, will cost nearly $1 million. And while he is benefiting from reimbursable tax credits due to the historic nature of the building, $150,000 in private investment and seeking bank loans, Nenortas also launched a $107,000 crowdsource campaign — through Mainvest — earlier this year, which exceeded its goal.

As an added incentive, Nenortas’ campaign included benefits for investors at various levels, including 10% off purchases at Moxi on the Rocks for life, access to VIP events, including the grand opening next year, and an 80% return on investment for initial investors — over a 10-year repayment period.

Ultimately, Nenortas’ vision is for his establishment to be a one-stop tasting location for Connecticut-based beverages, including alcoholic and non-alcoholic options.

“We’re very excited for [people] to come and experience [many of] Connecticut’s beverages under one roof,” he said.

He says interest from other crowdsource investors motivated him to launch a second, but smaller, campaign.

McCormack has seen similar demand for WeHa Brewing and Roasting Co. and will likewise be launching a second-round funding push, this time with investor perks, like a “mug club” rewards program, as part of the draw.

It’s a small way to offer something to the community of investors that have helped make his dream come true.