Unique Ways Entrepreneurs Are Raising Money

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The credit crunch has undoubtedly put the squeeze on small businesses. Bankruptcies within this group hit 7,514 in May, up 40% from a year ago, according to Automated Access to Court Electronic Records, an Oklahoma City bankruptcy data and management company. Despite those numbers, there are plenty of entrepreneurs who refuse to throw in the towel. Instead they're coming up with creative ways to keep their companies afloat.

When Brooklyn coffee shop owner, Debi Ryan, was faced with the possibility of shutting her doors, she appealed to her neighbors, asking them to become mini venture capitalists and invest in her business. As a result, she just hosted a grand re-opening. Instead of taking a loan or seeking venture capital funding, entrepreneur Paula Conway managed to pay for the launch of her travel web site with money she made selling — of all things — cupcakes.

Taking such unconventional routes to raise cash has become a necessity for many small-business owners as traditional sources of funding (i.e., venture capital and bank loans) have dried up, says Peter S. Cohan, president of Peter S. Cohan & Associates, a management consulting and venture-capital firm in Marlborough, Mass. In the first quarter of 2009, venture-capital firms raised 40% fewer funds (a total of $4.3 billion) than a year ago, according to Arlington, Va.-based trade group National Venture Capital Association. "The businesses that are going to survive are getting creative about raising as much money as they can," says Cohan.

Here are five businesses that are doing just that:

Turning neighbors into investors

Vox Pop, a café and bookstore in Brooklyn, N.Y., now has 144 new investors — and they all live in the neighborhood.

In January, Vox Pop's CEO, Debi Ryan, received notice that the Department of Health would pull the store's license to serve food and beverages unless it paid fines tallying $33,000 — an amount that would force the shop to fold. The fines, which resulted from such infractions as baristas drinking coffee behind the counter and not having a manager on duty at certain times, originated in 2007 but soon escalated when the store failed to pay them, says Ryan, who took over the shop just two weeks before the Health Department issued its notice.

Instead of giving up, Ryan turned to the local community for help. Two town hall meetings and almost three months later, Vox Pop raised $64,000 from local investors. "It's great," says Ryan who celebrated the store's grand re-opening in May. "Now they can say 'That's my coffee shop' and mean it."

Launching a business on the side

Paula Conway only needed $3,000 to launch her Westport, Conn.-based travel information web site ConwayConfidential. While she didn't have enough cash on hand to pay for the site, she did happen to have plenty of sugar, flour and icing.

Rather than ask friends and family to hand her some cash, Conway sold them cupcakes — and the side business swiftly grew. "It just sort of happened," she says. "Knowing that I needed money for the site, I started to wonder: Would they pay for them?" She says family, friends and neighbors were glad to hand over a dollar or more per cupcake. She even managed to cater a few parties with her cupcake creations. Within six months, Conway met her financial goal.

Appealing to customers' charitable sides

Brighter Planet, a Middlebury, Vt., company that sells emissions reduction credits to individuals and organizations looking to offset their carbon footprints, hopes encouraging customers to shop will help it raise cash — and save the planet.

Through a partnership with Bank of America, Brighter Planet offers its members Visa-branded credit and debit cards. The company receives 2.1% of every dollar cardholders spend using their affinity cards. Since 2006, the company has raised roughly $350,000. While much of those funds have gone toward investments in alternative-energy projects and carbon-offset purchases, the company also uses a portion of the proceeds to support the business, says Patti Prairie, the company's CEO. (The company outlines how it spends revenues generated from the cards in the cardmember agreement.) "Instead of getting miles, we're helping people invest in clean energy," she says.

Selling ad space one pixel at a time

When Dushyant Bhatia co-founded Blogertizeworld.com (formerly the site was known as Blogertize.in), an online portal that allows users to search blogs, he decided to try his luck at a unique fundraising strategy that he had seen on a marketing web site called the Million Dollar Homepage. The idea: Raise cash by selling blocks of ad space on Blogertizeworld.com's web page called "pixel blocks."

The entrepreneur, who is based in Mumbai, India, decided to pitch the idea to the community the site was serving — bloggers. He asked them to buy a three-year block of space on the site for $15 to $150. So far, the site has raised $55,000 from the block sales. Bhatia says he plans to reinvest about 70% of the proceeds into the creation of an online shopping portal, an ad exchange network and quizzing and contest portals.

Turning contest winnings into start-up capital

When software developer, Aaron Foss, and oncology nurse, Keri Mahoney, were trying to raise money for their medical software company, Smart Medical Solutions, which operates SmartChemo.com, they broke out the video camera and created a commercial. The production had nothing to do with the company's software, which helps oncologists track and administer patients' treatments, but instead featured the two "playing" Red Stripe beer bottles to the tune of Bob Marley's "One Love." The two then submitted the commercial to the beer company's "Be a Red Stripe Ambassador" contest.

The beer bottle-playing paid off. Foss and Mahoney won the grand prize: a one-week vacation to Jamaica for nine people. But rather than take the trip, which was valued at $40,000, they asked Red Stripe for cash. The company agreed and gave the burgeoning business owners a check for $20,000. "We like to think that Bob Marley is our angel investor," says Foss.

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