Banks aren’t lending to small businesses, the housing crisis has choked off home equity lines of credit, and private investors typically look the other way unless there’s a clear and attractive exit strategy. So what’s a struggling Main Street company in need of capital to do? Larry Baker and Charlie Tribbett think they have a solution. Their company, Bolstr, gives small businesses a platform on which to raise money online from people in their communities—without giving away equity. Instead, investors are paid back with a percentage of the company’s gross revenues on a quarterly basis for a defined period of time.
“A Pepperdine study shows that $42 billion a year is invested in small businesses from friends and family,” says Baker. “But it’s informal and fragmented – like an uncle lending $10,000 to his nephew on a napkin.” So he and Tribbett, who met as interns at J.P. Morgan back in 2005, decided to leverage the crowdfunding model popularized by companies such as Kickstarter, to help add liquidity to Main Street businesses.
While the JOBS Act, passed last April, is expected to vastly increase the number of crowdfunding platforms when it is enacted next year, Baker and Tribbett wanted to find a way to operate within the current regulatory market. “We conceptualized the idea a year ago and then started working on the brutal regulation compliance side of it,” says Tribbett. Under current regulations, crowdfunding platforms may only transfer capital from unaccredited investors to businesses if they are donation based, as is Kickstarter. So Bolstr does not actually transfer capital on behalf of investors. Instead, the company serves as a platform for small businesses to run and organize fundraising campaigns; the transactions are completed privately, not through Bolstr.
Still, the company has it’s own strict standards. Businesses must answer a series of questions about their products and services, market dynamics, risk factors, five-year projections and how they will use the proceeds. “We make sure every company has two years of revenue, and no prior bankruptcies or liens,” says Baker. Bolstr also does a background check on all owners, and, adds Baker, “we’ve come up with a proprietary model where an attorney reviews each offering before it goes live on the platform.”
An Innovative Model
Bolstr is currently in private beta, with a handful of companies already raising funds on the site. Tribbett says they are working with local partners such as microfinance non-profit ACCION USA, community banks, Chambers of Commerce, and Small Business Development Centers to find good candidates for the site. All campaigns are private; businesses must invite potential investors to view their offerings. “We’re really focused specifically on mom and pops – the small businesses on the corner,” says Tribbett. “They don’t necessarily want to post all of their information on the Internet.” Current Bolstr campaigns – which typically seek to raise between $10,000 and $50,000 -- include a coffee shop needing capital to buy a new industrial-sized coffee grinder, and a wholesale artisanal bakery that requires funds to open up a retail operation.
When the campaigns reach their fundraising goals, Bolstr helps the companies calculate the rate of return to each investor, reminds them when payouts are due, and tells them the impact to their gross margins while payouts are being made. For investors, returns are entirely dependent on the success of the business, so there’s a huge incentive to, say, frequent the local coffee shop rather than the Starbucks down the street.
Preparing for JOBS
Currently, Bolstr isn’t charging companies to use its platform. “Our goal is really just to get feedback on how we can improve the site,” says Baker. With the nuances of the JOBS Act still being debated, the partners are taking a wait-and-see approach. “After the bill is written, we’ll lay on the revenue model,” says Baker. That may involve charging companies a percentage of their total capital raise.
Like many of the businesses it hopes to serve, Bolstr got its initial funding from friends and family and is likely to require additional capital as the company grows. But the company won’t take advantage of its own platform. “We don't fit the criteria of our target demographic,” says Baker. “We are laser focused on helping Main Street small businesses at this time.”
Donna Fenn is a business journalist and co-founder of Y.E.C. Mentors, an initiative of the Young Entrepreneur Council. She is author of Upstarts! How GenY Entrepreneurs are Rocking the World of Business and 8 Ways You Can Profit From Their Success and Alpha Dogs: How Your Small Business Can Become a Leader of the Pack.