WSJ Small Business | Leslie Josephs | June 16, 2015

Online arts and crafts marketplace begins allowing sellers to raise funds for new production

Etsy Inc. is crafting a new revenue stream: crowdfunding.

The Brooklyn-based artisan-and-vintage marketplace is planning to launch as soon as Tuesday a pilot program in which sellers can raise money on the company’s website to fund the manufacture of new products.

“We’re super passionate about our seller community,” said Joe Lallouz, an Etsy product manager. “What are the best ways to help them grow and scale? A lot of sellers identified financing as a big hurdle to growth.”

Etsy, which has 1.4 million active sellers, would take its usual 3.5% of each transaction plus a 20-cent posting fee. It says sellers likely will use the funds raised to buy new equipment and materials or cover staffing costs.

A two-month pilot for its Fund project is launching amid a boom in crowdfunding campaigns. More than 1,250 online platforms world-wide raised $16.2 billion combined last year, up 167% from 2013, according to a March report by Los Angeles-based research firm Massolution. Crowdfunding for the business and entrepreneurship categories comprised more than 41% of that amount, or $6.7 billion.

But the boom has also drawn scrutiny from regulators.

Learn: 6 Canadian provincial regulators adopt Crowdfunding start-up exemption

Last year, PayPal established a policy intended to avoid complications when entrepreneurs raised money through crowdfunding. The policy allows entrepreneurs to have access to the funds immediately as long as buyers are informed of risks, including the chance they will never receive the product.

“I would predict that we would see more scrutiny and more regulation coming” of crowdfunding, said Richard Swart, a researcher at the University of California, Berkeley, and an crowdfunding consultant.

Etsy said it would not charge backers’ credit cards until a seller’s funding goal is met. Some 100 vendors will participate, and the company is recommending a nine-month delivery window for products created using crowdfunding. An Etsy spokeswoman said it expects most crowdfunded products to ship within six months.

Some entrepreneurs say shallow cash reserves are a challenge to their growth, so they often turn to crowdfunding sites such as Kickstarter to cover production costs for new products.

Carolina Alvo, who founded her namesake clothing brand in early 2014, is considering a second Kickstarter campaign to help cover the costs of expanding her petite-size clothing line. Kickstarter collects 5% from the funding total and a between 3% and 5% processing fee if the campaign is successful. It charges nothing if a campaign isn’t successful, according to its website.

She said she used her own money to launch her brand’s first items. “It was definitely a strain,” said the New York-based designer, adding that a Kickstarter campaign she ran last year to raise $15,000 helped her gauge consumer interest.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country.  NCFA Canada provides education, research, leadership, support and networking opportunities to over 1100+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada.  Learn more About Us or visit ncfacanada.org.