Crowdfunding – the practice of financing a business by raising relatively small amounts of money from a large number of people, typically via a web platform – comes in several forms. While donation and rewards-based crowdfunding such as Kickstarter can be the right choice to get your business rolling, small businesses are increasingly turning to marketplace lending and investment crowdfunding platforms to finance their growth.

Differing Approaches to Investment Crowdfunding

Investment crowdfunding platforms such as Crowdfunder and AngelList focus on tech startups. CircleUp takes a somewhat different tack. It's a marketplace that matches consumer companies with individual investors. However, CircleUp, like the others, is oriented toward accredited investors and fundraising amounts of more than $1 million – hardly in the sweet spot for human scale businesses needing tens or hundreds of thousands of dollars. Localstake seeks to fill the void by helping consumer businesses raise amounts ranging from $50,000 to $500,000.

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Lower Offering Costs Enable Lower Offering Amounts

Localstake helps businesses raise money in the form of preferred stock, convertible debt, and revenue share loans. In the not-too-distant past, the "private placement" of such securities (i.e. outside of a registered public securities offering) was typically only realistic when offering an amount in the millions of dollars. Restrictions on how such offerings were communicated to potential investors and other costs of compliance with Federal and state securities laws required a lot of expensive, specialized labor. Transaction costs in the hundreds of thousands of dollars were the norm. If it costs that much to raise capital, you'd better be raising millions.

Over the last few years, emerging technologies and more relaxed regulations have lowered the upfront cost of raising money as well as the ongoing cost of managing relationships with dozens of individual investors. That's what makes offerings of less than $1 million plausible.

A Conversation with Ryan Flynn at Localstake

I spoke with Ryan Flynn, a co-founder of Localstake, to learn more about his company's investment crowdfunding niche.

Making an offering of preferred stock, for instance, is a much more involved process than is pre-selling a product or getting a bank loan. Regulations must be navigated, deals must be structured and documented, and investors must be cajoled toward a timely closing. In other words, the functions of the investment banker must still be performed. Ryan said, "We are helping our customers at every point along the process of a capital raise." That help comes in several guises throughout the fundraising journey:

* Analyzing the appropriate type and timing of an offering

* Developing a business story

* Managing communications with prospective investors

* Collecting indications of interest ("soft circles")

* Gathering investment commitments ("hard circles")

* Creating documents and getting everybody's signatures

* Transferring funds, and

* Administering reports and payments to investors

Ryan says, "We definitely are trying to utilize technology as much as possible throughout the process." The effect of the application of technology is reflected in Localstake's current pricing structure:

* Phase 1: Build a profile and connect with investors – $199 per month

* Phase 2: Sign investment documents, verify investor eligibility (if applicable),