Deciding which money to take when launching a business is usually a simple calculation: take the cheapest money. Whether you are calculating the interest on a loan or the projected value of equity you are exchanging, the goal is almost always to find the cheapest money. But that is not to say that there are not other factors to consider, and the emergence of crowdfunding has highlighted a few that today's entrepreneurs have to consider.
To get inside the mind of an entrepreneur who has faced this decision recently, I talked to Alexander Luik and Julia Westermann, Founders of Otto Wilde Grillers, for insight into how they calculated their funding options.
Otto Wilde Grillers just had their project, a highly specialized grill called the Over-Fired Broiler (OFB), fully funded on Kickstarter in just 10 days to the tune of $102,000. And their project is still collecting backers as it does not end until May 6th. For them, the decision to crowdfund their product launch was an easy one.
"The Founders of this company are all very good friends and some of us are family," notes Luik. "For us the company is about more than dollars and cents, it is a real passion of ours, and we didn't want to give away ownership to see it realized."
While ownership is a common sticking point in funding negotiations, it can carry with it very real business consequences, particularly for companies that are selling a tangible product. The grill, for example, was designed by one of the Founders' grandfathers, named Otto, and for whom the company was also named. The familial ties to the product were central to the identity of the company and bringing in an investor who may have wanted to hire outside engineers to change the product would have defeated the original vision of the company.
In fact, Luik and Westermann did receive offers from venture capital firms. The offers would have been more than enough to set up their operation, produce the first batch of O.F.B.'s, and market the product. But there are other benefits of crowdfunding that entrepreneurs have to consider.
Customers, not investors, purchase products, and crowdfunding provides startups the opportunity to connect with consumers who actually want the product to succeed.
"We think our product is disruptive. It's different - the technology is different, the style is different, it is even a divergence from standard grilling culture," says Westermann. "But we knew there was a market for it and that consumers would see the vision, more so than an investor. We wanted to do what consumers wanted; not what investors wanted."
Their product is disruptive. The O.F.B. uses infrared technology to cook at temperatures approaching 1700 degrees fahrenheit. When steak is cooked that hot it triggers the Maillard Reaction, where the amino acids and reducing sugars in the meat melt together to create that crust you get at a nice steakhouse. In other words, this is not your ordinary Wal Mart barbeque; this is your F35 fighter jet of home grills.
And like Luik and Westermann thought, there was a market for it in its original form.
Luik says of their success on Kickstarter, "Crowdfunding this project created the opportunity for consumers to purchase a product that was the original creation of our team, not a trimmed down version designed by an investment firm looking to double its money."
That is a common sentiment among entrepreneurs who are turning to crowdfunding more and more often. And of course it's hard to beat the price, which is basically free. That would make crowdfunding the cheapest money by far.