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Originally published Sunday, February 16, 2014 at 8:00 PM

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Ethics of crowdfunding campaigns questioned

As financing platforms grow more prevalent on the web, it is easier than ever for merchants to solicit funds from customers — but is it a good idea?


The New York Times

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After nine years in Brooklyn, The Chocolate Room — a popular purveyor of wine, cake, candy and coffee — experienced one of those cataclysmic events retailers fear: a crippling rise in rent.

Informed in late 2012 that they would face an increase of more than 500 percent, the cafe’s owners, Naomi Josepher and Jon Payson, reluctantly decided to abandon their space and begin figuring out how to finance a $200,000 relocation.

The couple are still paying off private and family loans for their startup costs. So Josepher and Payson took a suggestion from their customers and started a crowdfunding campaign on Kickstarter.

Word spread quickly, and by the third day, the shop had more than $1,000 pledged toward its goal of $40,000.

Then the resistance began.

“There’s something about asking your customers to help fund your expansion that just feels a little ... wrong,” posted a commenter on one community website. “Cool or not cool?”

“NOT COOL,” came the overwhelming verdict. The Chocolate Room had unwittingly stepped into a fiery debate about the ethics and etiquette of crowdfunding.

As financing platforms grow more prevalent on the web, it is easier than ever for merchants to solicit funds from customers — but is it a good idea?

Travail Kitchen & Amusements, a restaurant in a Minneapolis suburb with a cultlike following, became a prime example of these concerns when it completed a successful Kickstarter campaign in October. Seeking $75,000 for a relocation and expansion, Travail netted almost twice that amount in 24 hours. The monthlong drive eventually brought in more than $255,000.

“I don’t get it,” a local columnist, Jon Tevlin, wrote in The Star Tribune. Why, he asked, were so many people willing to subsidize a for-profit business?

The money raised through sites like Kickstarter is essentially a donation. Creators seek funds for a specific project and typically offer goods or services in return, but those who back the project receive no stake in the enterprise. Congress legislated “equity crowdfunding” in 2012, but the Securities and Exchange Commission is still drafting the rules.

Tevlin said his column drew a mixed response. While many agreed with his skeptical take, younger readers tended to take a different view. “They saw it as a contribution to the local culture, almost like giving to the local art institute,” he said. “It’s not how I would choose to spend my money. If I give to a startup restaurant, I would expect stock or a cut of the proceeds.”

Lynette E. Krajewski started a fundraising campaign in September to open Community Oven, a bakery and pizza shop in Rockland, Maine. Her previous restaurant, which closed in 2011, had been financed through bank loans and $200,000 of her family’s savings.

Taking a chance

Reluctant to assume more debt, she and her husband took a “crowdfunding or bust” approach to Community Oven: If the project did not hit its goal, the shop wouldn’t open.

The campaign drew donations of more than $8,000 from former customers, employees, friends and supporters. It also attracted hate mail. “I got some pretty irate messages from people saying, ‘You shouldn’t be doing this, you’re asking for handouts,’ ” said Krajewski, who came up short of the $50,000 goal and did not move forward with the restaurant.

Don Steinberg, the author of “The Kickstarter Handbook: Real-Life Success Stories of Artists, Inventors and Entrepreneurs,” said he saw a parallel between what some business owners experienced and the blowback against recent celebrity-led crowdfunding campaigns.

Yes, Spike Lee raised $1.4 million for a new film, but dozens of other star-studded projects sank. Zosia Mamet, a star of “Girls,” failed to raise $32,000 to finance a music video.

“It’s the same thing, wondering whether established enterprises really should be asking for money this way,” Steinberg said. “They aren’t struggling artists or inventors trying to get started. It seems to defy the spirit — and the name — of Kickstarter.”

One problem, entrepreneurs say, is the perception that local businesses are more financially successful than they really are. “We are doing very well,” said Josepher, of The Chocolate Room, “but like most small businesses, we carry heavy debt. After 10 years, we’re still paying other employees more than we pay ourselves. We don’t have a huge cushion to dive into.”

Travail opened three years ago in Robbinsdale, Minn., with just $2,000 in the bank, said Megan Leafblad, the restaurant’s director of business development.

The expansion will cost more than $1.4 million. Subsidized financing from a local economic-development authority brought in $300,000; most of the rest is coming from loans and the owners’ personal funds. Keeping dining prices low is a priority, and every dollar Travail borrows cuts into its flexibility to do that, Leafblad said. That is why Kickstarter seemed attractive.

But money raised through the site does not come free. Kickstarter takes 5 percent of the total as its cut, and credit-card processing fees consume another 3 to 5 percent. And those who pledge money are typically rewarded with discounts or gifts.

“One of the reasons we went with Kickstarter is that their mission is about funding creative projects,” Leafblad said. “We approached it as a community-engagement tool. Yes, you’re looking for money, but you’re also looking to build a community around your idea.”

Not all successful

More than half of the campaigns on Kickstarter fail to reach their goal. When that happens, all pledges are canceled. That is how The Chocolate Room’s campaign ended. It drew pledges of $9,647 from 63 backers but fell far short of its target.

Some crowdfunding sites, like RocketHub, FoodStart and Indiegogo, allow project creators to keep the money even if they do not reach their goal. That helped Krazy Jim’s Blimpyburger, a 60-year-old restaurant in Ann Arbor, Mich., that lost its lease last year when its landlord sold the lot. The family-owned business, which closed in August, is scrambling to piece together $330,000 to relocate and reopen.

Emily Magner helped her parents organize fundraising projects, including an Indiegogo campaign. “I think people who value Blimpyburger see it as more than a for-profit business,” she said. “It is an Ann Arbor tradition for many, and we just want to keep it going.”

The restaurant’s Indiegogo drive, which ended last month, brought in $20,396 of its $60,000 goal. Magner said her family considers that a success: “Each of the 462 contributions was a vote of support.”



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