The news that Jack Dorsey's Square is entering the arena of small-business lending raises a timely, ever-vital point for entrepreneurs: Though there are signs lending is on the rise, obtaining an old-school bank loan remains a difficult chore for mom-and-pop, "main street" businesses.
A 2014 survey by the Institute for Local Self-Reliance (ILSR) revealed that 42 percent of local businesses needing a loan in the previous 2 years had been unable to obtain one. This was no small survey. It included 2,602 companies, nationwide.
Of course, there are popular alternative lending services, like OnDeck and CAN Capital. But these, as Patrick Clark recently reported in Bloomberg Businessweek, can charge annualized interest rates as high as 134 percent. Those rates may seem astronomical, but the fact is, alternative lending remains popular. It offers quick approvals to an audience that craves fast cash. Moreover, OnDeck executive Andrea Gellert makes a valuable point when she argues that for entrepreneurs, interest rates are often nothing but opportunity costs. Clark writes:
Gellert posited a hypothetical business owner who has a limited amount of time to buy discounted inventory. "If I buy that inventory for a dollar and sell that inventory for $2 in a six-month period, that's a 200 percent return. So my 54 percent cost makes absolute sense. I will make that tradeoff every single time."
This much is clear: Business owners of the past, present, and today are hungry for liquid cash.
Local Lift, a three-person startup incubating at Harvard University's Innovation Lab since September, is hoping to provide that cash with its main product: a rewards-crowdfunding platform focused on local businesses (coffee shops, yoga studios, etc.). So far, Local Lift has helped 13 businesses in New Orleans and Austin (its launch cities) raise $104,901.
Crowdfunding for Retailers?
CEO Broderick McClinton and his founding team are in the process of exploring how viable and valuable a niche-crowdfunding platform can be as a scalable opportunity.
On the one hand, the user-base is enormous: It is, ostensibly, the nation's entire cash-starved population of small and midsized retailers. The ILSR notes that crowdfunding, ballyhooed though it is, at present equals only 1/5 of 1 percent of the small business loans made by traditional institutions. Which means there's room for growth.
On the other hand, sites like Kickstarter and Indiegogo (which recently raised $40 million from heavyweight VCs) already have a foothold as first movers and market leaders. Generally speaking, when a business wants to crowdfund one product or another, you read or hear about it doing so on one of those two sites.
McClinton admits that those well-known platforms are better fits for tech businesses, video games, or creative projects. Local Lift's mission is different: Its aim is to help indie, neighborhood retailers.
"For those [creative or high-tech] projects, you're not about being local--you need a large audience," he says. "Everyone gets caught up in the numbers. But if you're a coffee shop in Austin, your chances of getting funding outside your community are almost nil. Plus, you can't ship your services [as a potential reward for your crowdfunders]. Our platform is local communities, in a city-specific way."
Then there's this overlooked fact: Many small business owners have still never considered crowdfunding as a potential source of cash. McClinton says that he and his team have literally talked their 13 fundraisers through the process. For example, if a retailer needs to raise $5000, she would be wise to set her public goal at $6,000. This way, she'd still clear the $5,000, after yielding to Local Lift its 7 percent fee, plus a roughly 3 percent fee to Stripe for payment processing (it's technically 2.9 percent of funds raised, plus $.30 per transaction).
Rudimentary as it may seem to consider these costs, it's something that crowdfunding neophytes might overlook in their haste to launch a campaign. Then there's the work of promoting your campaign, by flexing your mailing-list muscles and harnessing social media. "It's not an easy task for them," he says. "Regardless of where you do it, you have to push your own networks and following, and turn those people into funders. There won’t be a magical rush of customers that come from the bigger platforms."
Sitting on the Other Side of the Table
So far, Local Lift has raised $40,000 in capital from Dorm Room Fund and Rough Draft Ventures, plus another $12,000 from the Rock Center at Harvard Business School. The company's immediate emphasis--and the reason it's eager to raise a larger round by late fall--is to enhance and develop its initial product, the crowdfunding platform itself.
McClinton believes that he and his team have gained deep insights about small business owners, insights that they can bake into a redesigned product that would be extremely user-friendly for non-techie business owners. The overall idea is to get the formula right in New Orleans and Austin, and then to scale it.
But is it the type of endeavor that investors will eagerly capitalize? Scott D. Anthony, a managing partner at Clayton Christensen's Innosight consultancy who's seen many a disruptive business model come and go, believes that the crowdfunding space could be home to plenty of niche players. "I don't think funding is a winner-take-all market," he says. "I think there is room for lots of people who take lots of approaches to help lots of entrepreneurs take the next step in fulfilling their dream."
He adds that a startup like Local Lift--community-minded and main-street friendly as it is--might even be the potential recipient of funds or capital from foundations or nonprofits or government organizations with community-development or so-called "locavore" missions.
Lessons from Groupon
Established crowdfunding sites are generally places where the funders receive rewards of some kind in exchange for their contributions.
At Local Lift, this takes place too, but it's at a more granular level. Here's where McClinton says his team has learned some lessons from watching how retailers have responded to social coupon sites like Groupon and LivingSocial. As a brilliant study in the MIT Sloan Management Review points out, coupons from these sites--while helping lure new customers through the door--often do not lead to repeat customers or profitable customers.
By purposeful contrast, Local Lift has designed its campaigns to foster customer loyalty--and to give the retailer a quicker path to breaking even on the offered incentive. For example, the incentives are more likely to involve repeat visits to the retailer--or enticements for referring a new customer--as opposed to one-off strictly fiscal discounts.
A Path to Conventional Lending
One story McClinton likes to tell is about RedBird Pilates and Fitness, an Austin-based business that raised $10,725 through 90 supporters on Local Lift. One of the owners, Lee Vallely, spent 20 years in the health and wellness industry as a teacher and consultant. "Despite all that experience, she could not get a bank loan," says McClinton. "She had trouble even starting the conversation."
But now that she's raised a five-digit sum on Local Lift, McClinton says that the lenders and brokers are approaching Vallely.
Perhaps, then, there's a secondary niche for this form of niche-crowdfunding: Yes, it can potentially fill a lending void, but it might also serve as a stepping stone from which entrepreneurs can take the leap to conventional forms of lending.
That's something that local business owners are sure to sign up for.