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Businesses turn to online fundraisers to generate money

Published: Friday, Dec. 13, 2013 5:30 a.m. CDT • Updated: Friday, Dec. 13, 2013 10:00 a.m. CDT
Caption
(Kyle Grillot – kgrillot@shawmedia.com)
Owner William Gee stands inside the dining section of the New China restaurant in Fox River Grove. A January grease fire caused between $150,000 and $200,000 in damage to the restaurant. Due to expenditures related to building code compliance during construction, New China has encountered financial shortages from insurance coverage. Several local businesses have turned to crowdfunding to raise money to keep the business alive.

When patrons found out the New China Restaurant in Fox River Grove was struggling to reopen after a fire in January, one of them started an online fundraiser to help with the repairs and renovations.

Among the work that is needed is new plumbing, floor drains, heating and cooling updates, electrical installation, sprinkler system installation and a new hood system for the kitchen, according to the fundraiser’s website.

Online fundraisers to help a business make improvements, or help projects get off the ground and started have become more and more common, especially with sites such as Kickstarter.

New China Owner William Gee said he was thankful for the fundraiser.

“If someone wants to help us, it’s a godsend,” Gee said.

It was underestimated how much it would cost to bring the 90-year-old building, where New China is located, up to modern codes before it can reopen, Gee said. Insurance money only covered fire-related damages.

Upgrades and repairs didn’t move along as hoped, as the project was mismanaged by the original contractor, Gee said. The Gee family never received a written proposal or detailed contract for the project from the original contractor, Gee added.

The 37-year-old business has been the key income source for Gee and the Gee family.

“I would have never thought the day would come I would have to work for somebody else,” Gee said.

Before the McHenry Drive-in, owned by Golden Age Cinemas, won a contest through Honda, the business was trying to raise money to buy a digital projector, through an online crowdsourcing campaign.

Scott Dehn, president of Golden Age Cinemas, had a campaign on the fundraising website Kickstarter with a goal of $130,000 for a projector and accompanying maintenance. When that campaign fell short, he didn’t receive any money from Kickstarter and had to start over.

Earlier this year, however, Dehn received enough online and text-message votes through Honda’s Project Drive-In contest to be one of the drive-ins in the country to receive a digital projector.

Rita Garry, a Chicago-based attorney with Golan and Christie who specializes in crowdfunding, said campaigns where people donate money in exchange for perks, is called crowdsourcing. There are about 750 of those types of sites, Garry said.

In the case of New China restaurant, perks include free food and recognition on the restaurant’s donor wall.

Garry said people commonly call crowdsourcing, crowdfunding.

Crowdfunding isn’t legal yet, Garry said. The rules for crowdfunding are still being formulated by the Security Exchange Commission. Proposed regulations came out in October.

Garry said a successful crowdsourcing campaign needs to tell a compelling story, such as one that will tug at the heart strings.

“A lot don’t plan campaigns very well because they don’t do a lot of planning and don’t tell a story that is compelling,” Garry said. “It won’t meet the goals of the campaign.”

Garry noted crowdsourcing websites also may take a percentage from the money raised, as they need to administer the campaigns.

“You can’t have a bake sale .... without buying the ingredients,” Garry said.

She also said crowdsourcing may just be a fad and might go away.

“How many $10 T-shirts do I want to buy?” Garry said.

When crowdfunding becomes legal, which is expected to be in the late summer of next year, it will allow people to contribute toward a proposed business and then gain equity in that business.

Congress created crowdfunding as part of the 2012 Jumpstart our Business Startup Act, as small businesses have had difficulties finding capital to start up, Garry said.

“Before the recession, when entrepreneurs wanted to start a business, they would take out a home equity loan or borrow from friends or family,” Garry said.

However those sources of capital may be tapped and private equity firms may not be interested in small businesses.

Crowdfunding can become a way to fill the funding gap for small start up businesses, Garry said.

When crowdfunding is allowed to move forward, small businesses will be permitted to raise $1 million in a 12-month period through regulated Internet sites called funding portals or intermediaries.

On the funding portals, entrepreneurs or small businesses will be able to put up listings of their business and say why they need to raise capital in exchange for stock in the company.

“I will be your investor,” Garry said. “I’m not doing this out of a goodness of my heart. I’m doing it to own a piece of your company.”

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