Entrepreneurs hoping to raise capital need to know about “Twig the Fairy” and the Suburbs.
Twig is a Renaissance Festival character created by author and performer Kathy Gfeller, and the Suburbs is a rock band that was once a legend — at least up here in the north country.
Neither is a business, exactly, but their recent fundraising should remind entrepreneurs of a business principle that won’t change no matter how much crowdfunding catches on.
People invest in people they know.
The reason why this comes to mind is that in three weeks entrepreneurs are finally going to be allowed to generally solicit investors, one provision of an April 2012 law called the JOBS Act. Entrepreneurs will even be allowed, in a closely regulated way, to publish ads seeking investors.
Along with the proliferation of crowdfunding sites, which pool money from individuals looking to back products, projects or companies, this loosening of the rules has given rise to talk that we are entering a new era of private capital investing.
Yet there’s every reason to suspect that this new era is going to look a lot like the last one and the one before that. What will matter are personal relationships.
That’s what Minneapolis entrepreneur and e-commerce consultant Lou Abramowski learned putting together three successful crowdfunding projects for Twig the Fairy.
Twig is a popular character, at Renaissance festivals here and around the country. In 2010 Gfeller and Abramowski used Facebook to gather funds for a new Twig children’s book.
A year later, Abramowski put a second Twig book project on the popular crowdfunding site Kickstarter, hoping to attract capital from outside of Twig’s followers.
While the project easily reached its goal, Abramowski said, only about 1.5 percent of the money came from outside of Twig’s network.
Last year there was another book, and this time Gfeller had created a highly polished Twig video, the reason Abramowski elected to try Kickstarter again. Twig’s new project was on the Minneapolis home page of Kickstarter for every one of the 23 days of its campaign and it raised nearly $35,000.
Kickstarter takes a 5 percent fee, so to get to break-even Kickstarter needs to generate at least 5 percent of the money. And in this case the total was about only 4 percent, even with prominent play on the site.
Patrick Donohue, a former partner of mine from the world of investment banking, said he knew all about Twig the Fairy. He said the appeal of the Twig product — a kid’s book about Twig, goblins and a unicorn — isn’t what entrepreneurs ought to envy. It’s Gfeller’s relationships.
Donohue is co-founder of a Minneapolis firm called Investyr that has for the past couple of years been teaching entrepreneurs a do-it-yourself approach to raising capital using the tools of social media such as LinkedIn and Twitter. He is excited by these tools and the potential of crowdfunding, but said what won’t change is that “there are two things that move money in business. There’s trust and there’s emotion.”
Building trust is hard, he said, and takes weeks or months, not days. Donohue noted that a 2011 Google study showed that a consumer considers an average of 10.4 pieces of information before committing to a purchase, and investors are just a form of consumers.
Messages on social media platforms such as Twitter may be considered a form of advertising, he said, but he does not intend for his clients to use them to pitch deals. Entrepreneurs should be pitching themselves, not deals.
Donohue pointed to the experience of entrepreneurs like Aaron Kardell, the founder and CEO of Mobile Realty Apps, as typical of successfully funded companies.
Minneapolis-based Mobile Realty Apps has nothing like the public visibility of Twig the Fairy. It’s a software company selling applications to real estate firms and listing services. What the company had that enabled a $1 million equity round earlier this year, Donohue said, is an entrepreneur investors knew and trusted.
“Of our recent round, all of it was from seasoned and accredited investors, and about … 43 percent was from individuals or firms I hadn’t met before the fundraising process,” Kardell said in an e-mail. “To be fair, that remaining 43 percent can pretty much all be traced back in some way to introductions or other help coming from people I already knew.”
Donohue said he walks his clients through a progression of the business relationship that leads to an opportunity to ask for an investment. First there are followers, then friends, and finally fans.
Yes, fans. Fans who might flock to rock ’n’ roll shows, or fondly remember the bands they saw before they started going to bed by 10 p.m. That brings me back to a band called the Suburbs and the power of a fan base.
Fans gave the Suburbs most of the $73,000 on Kickstarter for a new studio record that was released in August. It came 27 years after its last one.
Keyboardist and co-founder Chan Poling said most of the funds raised in the campaign, by far, came from fans, with a small amount from people he described as “fans of Kickstarter.”
“The thing that you do [for donors] on Kickstarter is for a dollar you get a thank you, for $10 you get the download, for $25 you get the CD and T-shirt,” Poling said. “It goes up and up until for $10,000 we will perform for you. I got two of those.
“Isn’t that great?”
It is great — if you have fans with that kind of cash.