The Midwest’s Venture Capital Problem, And How Crowdfunding Could Help Solve It

Picture Courtesy of www.inc.com

Picture Courtesy of www.inc.com

The story of Zach Supalla’s capital campaign for his startup Spark didn’t begin where tech fundraising typically does — not in a coffee shop in Silicon Valley or a board room in New York City. It began in Shenzhen, China, with Supalla in an office at night staring at his laptop.

Most of his employees, two people, were sitting next to him. The rest of the company, one person, was at world headquarters in a city not known for its tech startups: Minneapolis, Minnesota.

But it didn’t really matter where any of them were. They were launching a video on Kickstarter, an online crowdfunding site, and hoping the site’s users would like the video enough to pitch in $30 here, $40 there until the business had raised the $10,000 it needed to cover manufacturing costs for its product, a piece of hardware about half the size of your thumb that connects ordinary electronics to the internet.

At 11 p.m. China time, 10 a.m. Minneapolis time on May 2, Supalla clicked the launch button. He had a bottle of whiskey and plenty of Tsingtao beer nearby — the plan was to drink every time they took in another $1,000.

The company raised $568,000 over the month-long campaign. “We hit $10,000 in an hour and a half,” Supalla said. “We were having a really good time.”

Five years ago, Supalla would have been having a really hard time raising money. The fact that Supalla could raise a half a million dollars on the strength of a video bodes well for entrepreneurs in the Midwest, a region with a surplus of ideas and a dearth of capital to fund them. (The Midwest is defined in this article as: Illinois, Missouri, Indiana, Michigan, Ohio, Wisconsin, Minnesota and western Pennsylvania.)

In each of the last five years, the Midwest has come up with about 18% of the nation’s patents for invention, according to the U.S. Patent and Trademark Office. Yet it’s only received about 7% of the country’s venture capital funding, according to Pricewaterhouse Coopers.

That gap suggests that entrepreneurs in places like Missouri and Ohio are starting fewer businesses — not because they can’t come up with great ideas, but because they can’t find wealthy investors near them who will back those ideas.

And it’s not that all those patents are coming from Midwest corporations like Procter & Gamble, General Motors and Caterpillar CAT, which don’t need venture funding. Nearly the same proportion of individual inventors in 2012 came from the Midwest, 16%, as patents from the region, 18% — meaning small-time entrepreneurs are doing about the same proportion of the innovating in the Midwest as they are elsewhere.

New research suggests that crowdfunding sites like Kickstarter could help close the gap between the number of good ideas and the amount of money going toward them. An online plea for funding is just as convincing from across the country as it is from the house next door. Handshakes and backslaps will never go away, but new-age entrepreneurs could raise hundreds of thousands from a YouTube video and compelling blog post.

Early data suggests people with less access to capital are eager to experiment with crowdfunding sites. “Where you have pockets of this talent that is underused that doesn’t have access to angel money or venture capital money, you see experimentation,” said Christian Catalini, an assistant professor at MIT Sloan School of Management who has co-authored several studies on the economics of crowdfunding.

A June 2013 study concludes that after an initial showing of support from friends and family, online backers tend to be farther away from the projects they support than traditional investors.

And although most money on crowdfunding sites tends to go where you would expect — tech money to Silicon Valley and music money to Tennessee, for example — the study shows that some regions are seeing significant funding go to surprising sectors.

It is still too early to definitively say that crowdfunding is giving Midwest entrepreneurs capital they could not have accessed before, but early numbers point to that conclusion. Minneapolis, for example, ranks fifth in the country in tech funding, thanks to businesses like Supalla’s. Illinois ranks third in design, and Iowa comes in the top half of states for both video games and fashion, according to data the study’s authors collected from Kickstarter.

Kickstarter allows backers to fund projects and startups but not to actually invest in them in exchange for equity. But thanks to a relaxation of regulations beginning Monday, startups can now advertise their private placements, which should make equity crowdfunding on other websites more common.

But that won’t mean open season for investing. There are tight restrictions on who can legally do equity crowdfunding, according to Brian Korn, a securities and capital markets attorney at the firm Pepper Hamilton in New York. For now, equity crowdfunding it is limited to only those with $200,000 in gross income or $1 million in net worth. The 2012 JOBS Act included a blueprint to let less-wealthy people invest, but the SEC has not fully laid out the details of that plan. The JOBS Act requires that the SEC limits the amount less-wealthy crowdfunders can invest to $2,000 a year and the amount businesses can raise to $1 million a year. Companies will also have to complete SEC filings as extensive as those submitted during an IPO process, according to Korn.

Pages: 1 2

HEADLINE NEWS

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news [...]

NPRAfter Outcry, Crowdfunding Site Patreon Backs Off Plan To Raise ...NPRThe popular crowdfunding service Patreon has backed off plans to change its payment structure, after widespread, vocal and passionate opposition from creators and their fans. Last week, the site announced it woul [...]

TechCrunchHow hate speech crowdfunding outfit Hatreon crept back online ...TechCrunchIf you want to make a living creating white supremacist content, you're probably not going to do it via sites like Kickstarter and Patreon, which prohibit hate speech. Fortunately there's Ha [...]

EntrepreneurWhy Some Small Business Owners Are Turning to Crowdfunding to Save Their CompanyEntrepreneurMany owners of beloved local businesses, especially in pricier cities, have been forced to swallow their pride and appeal to their customers in times of crisis -- a process streamli [...]

CoinDeskKickstarter ICO? Don't Count On It Says Crowdfunding Leader ...CoinDeskThe company most widely associated with crowdfunding, Brooklyn-based Kickstarter, has no plans to get into the initial coin offering (ICO) business. Coming in response to the news yesterday that compet [...]

ForbesCrowdfunding Do's And Dont's From iFundWomen's Karen CahnForbesDuring our conversation, she was transparent in sharing that her first software company, VProud, failed because she “did everything backwards” and spent too much time trying to perfect the product. “Pe [...]

CryptoCoinsNewsCrowdfunding Giant Indiegogo Looks to Make ICOs MainstreamCryptoCoinsNewsCrowdfunding platform Indiegogo has a plan to help initial coin offerings (ICOs) break into the mainstream, even as the U.S. Securities and Exchange Commission (SEC) is ramping up its oversight of [...]

BBC NewsWu Yongning: Who is to blame for a daredevil's death? - BBC NewsBBC NewsLast month, Wu Yongning went out to do what he loved best - scale a skyscraper without safety equipment and film himself dangling off its roof by his fingertips. What happened next almost seems inevit [...]

TechCrunchFormer Gawker employees are crowdfunding an effort to buy Gawker.comTechCrunchWhile Univision acquired most of Gawker Media's sites last year (and renamed them as the Gizmodo Media Group), the deal didn't include Gawker itself. In fact, BuzzFeed reported last month [...]

NPRCrowdfunding For French CastlesNPRYou too can own a French chateau, in part, anyway. Romain Delaume, CEO of Dartagnans, tells NPR's Scott Simon about a crowdfunding effort underway to preserve La Mothe-Chandeniers. SCOTT SIMON, HOST: What if I told you that for about $60, you [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |