When Chas Smith was looking to raise money for his Vermont-based maple beverage startup, he faced a dilemma: build community or raise lots of money fast? That’s a question being asked more and more by entrepreneurs exploring the growing range of investment crowdfunding options.
Allowing your customers to invest helps to create an engaged and loyal community of supporters. But most crowdfunding options available to the public—including various exemptions offered by states and the federal Title III, which will go live nationwide in mid-May—limit how much companies can raise. And having dozens or hundreds of small investors can be a distraction for a busy startup and scare away big investors.
In comparison, selling equity shares to a smaller pool of wealthy accredited investors can seem an easier way to raise large sums of money with minimum hassle.
Smith (above, left) and his cofounders decided to have it both ways, pairing a debt-based offering under the Vermont Small Business Offering Exemption (VSBOE) with an equity offering for larger investors using Title II of the JOBS Act.
“Our initial thought was, we want to do an equity deal where everyone has a share in the company,” says Smith. But as a small startup with limited resources, they were worried they’d spend more time managing investors than running their business. “The pure model didn’t make sense.”
Working with Vermont-based DesignBook, a peer-to-peer marketplace for emerging businesses, the company fashioned a creative two-tiered financing structure that could point to the shape of things to come.
The company, called Smith & Salmon, Inc., is a family affair. In 2014, Smith had returned to his native Vermont after a stint working as a political aide in Washington DC, to enroll in the University of Vermont’s new sustainable entrepreneurship MBA program. He knew he wanted to start a venture that could benefit the Vermont community and be good for people and the planet. His father Charlie, who ran a small sugarbush, or maple farm, had been toying with the idea of making maple sap into a beverage. So they decided to give it a try. Nikita Salmon, a cousin who runs a 300-acre sugarbush just across the valley, signed on as a partner as well.
After much experimentation, they launched Sap!, a line of beverages made from a single ingredient: 100% pure Vermont maple sap. Most people know it in its boiled down form, as syrup poured over pancakes. But those in the business, including Smith and Salmon, grow up drinking it straight from the tree. The liquid makes a delicious—and healthy—drink.
Smith & Salmon’s first products are Sap! Maple Soda and Sap! Maple Seltzer with different levels of sweetness, both made by carbonating the sap. The beverages naturally contain electrolytes, antioxidants, manganese and over 40 other vitamins, minerals, and nutrients. “We’ve created a healthy soda,” says Smith.
In their first year, they did a small run of the product and sold in two stores. It went much better than they were expecting—consumers will soon be able to find Sap! maple beverages in over a hundred stores all across Vermont. The partners credit much of their success so far to their authentic, multi-generation connection to the state and its iconic maple business. They’ve built an entirely Vermont-based supply chain, sourcing their sap from about 30 sugarmakers across the state. They also use local firms to pack, transport and market the beverages.
Tapping Community Capital
As sales have grown, so has the fledgling company’s need for capital. As Smith was initially trying to figure out how to finance the operation, he came across the Vermont Small Business Offering Exemption (VSBOE), a law enacted in 2014 that allows Vermont businesses and start-ups to raise up to $2 million in capital by selling shares in their company or debt to in-state investors. For a locally sourced and made product, it was a perfect fit.
“For a consumer product especially, the rules make a lot of sense,” says Smith. “Our business is maple – it’s really easy to get people interested in our story because we have a physical product.”
He worked with some mentors and DesignBook, which also runs an online investment platform, to create a two-tiered financing structure that includes a debt-based offering through VSBOE and an equity offering through Title II of the federal JOBS Act. Title II — or, more technically, Regulation D Rule 506(c) — allows companies to advertise their offering broadly, but they can only sell their securities to accredited, or wealthy, investors. There are no limits on how much companies can raise or investors can invest.
The Title II deal, which carries a $25,000 minimum investment, allowed Sap! to bring in much larger investments. But they wanted everyday Vermonters to be able to participate as well, which is where VSBOE came in.
“We took care of the equity offering first,” explains Smith, “but felt really strongly that we needed to engage as many people in the community as possible. It was antithetical to our community-based Vermont business to only allow higher wealth individuals into the business.”
The VSBOE offer has a minimum investment of $500. It is a 6-year promissory note that pays 5% compounding interest. As an added (ahem) sweetener, the company offers a revenue kicker. “If we hit specific revenue targets over the next six years, investors get more money back,” explains Smith. “From a behavioral perspective, we wanted people to feel really a part of it, so we got creative about how to pay people back.”
Both offerings are ongoing on Venture.co, DesignBook’s funding portal. But have surpassed their minimums. Smith and his partners have raised $400,000 in equity through the Title II offering and $57,000 in debt through VSBOE from about 40 investors so far.
The capital has helped them expand at a stage when it is difficult for companies to get funding. Sap! had $8,000 in sales in 2015—hardly enough to get a bank to talk to them. “You have companies that no bank wants to give a chance to.” Smith explained, “Even if they do, they make you put your personal money or house on the line. The genius of the VSBOE rules is that they support start-ups in a phase where they’re not bankable.”
VSBOE has not only helped them raise money, but also served as an incredible community engagement tool. “The more people who are invested, the more advocates you have out there buying and preaching your product,” says Smith. “The leveraging effect will be massive for us, it already has been. It will help people trust our business, be fans and hopefully become investors over time. This is the magic of crowdfunding: it raises money and also builds community.”
Chas Smith’s, Crowdfunding Tips:
Community Pride Matters
To get community buy-in, people have to really believe in what you’re doing. People respond strongly to the language around community crowdfunding and locavesting. That sense of community pride really matters to people.
Convey Your Unique Appeal
Messaging is really crucial and in order to do it right, you need to understand why people want to invest. Step back and be really honest with yourself about how your company is going to appeal to potential investors. For us, it’s about maple, it’s about Vermont, it’s about creating a Vermont supply chain. Think about how you can make the emotional appeal to people and get them excited about what you’re doing.
Early Supporters Are Key
Your biggest advocates are still going to be your friends and family. Start by generating excitement among people you trust and people that love you. You need this initial momentum to get that social proof for your business or product and to get people excited about what you’re doing. Get those early adopters who will stand up and say, ‘I’m going to put my money into this, I love this,’ and then ask them for contacts and work into secondary connections.