Hartford Business Journal

10 HARTFORDBUSINESS.COM | OCTOBER 30, 2023 Researchers at Bloomfield-based LiquidPiston are developing lightweight rotary engine technology that aims to create a super-efficient version of a diesel engine. PHOTO | CONTRIBUTED Alternative Capital Here's how online investors propelled one CT company's growth By Hanna Snyder Gambini hgambini@hartfordbusiness.com B usiness crowdsource funding is not a new concept, but financial regulation changes in recent years have opened new doors for entrepreneurs struggling to find early-stage investment, partic- ularly in a challenging high interest rate environment. Traditional crowdsource funding efforts, on such platforms as GoFundMe, might raise a few thou- sand dollars in small increments for charitable or other causes. But more platforms are emerging with a focus on helping kick-start small businesses or other ventures. Bloomfield-based LiquidPiston Inc. has been one of the more active Connecticut companies leveraging crowdsource funding. It has raised more than $42 million since 2016, using multiple crowdsource options made possible by the 2012 federal JOBS Act. LiquidPiston's most recent funding round — conducted on the Wefunder platform — raised more than $23 million as of mid-October toward a $30 million target. The funds will help further develop the company's lightweight rotary engine technology that aims to create a super-efficient version of a diesel engine, said CEO Alec Shkolnik. It has taken a large amount of capital and time to develop the new technology, said Shkolnik, who has used other avenues to raise money, including venture and angel investor funding. But he said he's found many benefits of crowdfunding, including a strong base of small investors and the ability to maintain more company control. Other businesses — including well-known names like Peloton and Oculus VR — have also embraced the capital-raising method. The Wall Street Journal recently reported that even big companies — like GE Appliances — are using crowdfunding to gauge consumer interest in potential new products. Limited funding options Amid rising interest rates and other challenging economic conditions, "access to capital has gotten harder," said Frank Milone, CPA and founding partner of Glastonbury-based accounting and consulting firm Fiondella Milone & Lasaracina LLP. A young startup company — especially in the technology, bioscience or manu- facturing space — will often have limited or even no revenue, and need to raise money through non-traditional avenues, Milone said. "A traditional bank is not a funding source for those companies because there are no real assets, no real revenue," he said. "There's no profit because those companies are generating losses from investing in technology and innovation." Until a company becomes profit- able or well-funded, there are limited financing options, mainly venture capital, gifts or funding from angel investors, who provide capital to busi- nesses, including startups, usually in exchange for convertible debt or ownership equity. That leaves accredited investors, typically with net worths in the millions, in the position to fund such ventures in the private market. However, the 2012 federal JOBS Act established provisions that allow early-stage businesses to offer and sell securities through crowdfunding. It also allowed non-accredited investors — who have a net worth under $1 million and make less than $200,000 a year — to invest in startups through crowdfunding and "mini-IPOs." "And that slowly started the trend that we see today, where smaller investors, unsophisticated investors, are dipping their feet into the market," said Swami Venkat, who leads accounting and consulting firm Cohn- Reznick's CFO advisory practice. Kickstarter is a popular crowd- funding site for aspiring businesses. Since its 2009 launch, investors using the service have pledged $7.6 billion to more than 247,000 projects, according to the company. Most successfully funded Kickstarter projects raise less than $10,000, but a growing number have reached six-, seven-, and even eight figures, the company said. Other business crowdfunding websites include Indiegogo and SeedInvest. Crowdfunding paths The 2012 JOBS Act established several crowdfunding options for startups. Each comes with different levels of capital-raising limits and disclosure requirements. LiquidPiston has used two crowd- funding methods since 2016, when it had to "recapitalize," after two venture capital investments folded at the same time, Shkolnik said. "... That presented a real challenge for us," he said. "We went through a funding crisis and were exploring a number of different ways to fund." The company raised a total of $3 million from three separate Regu- lation CF (Reg CF) crowdfunding campaigns – in 2016 and 2018 using the Wefunder platform, then another in 2020 on StartEngine, raising the maximum allowed $1.07 million in nine hours from 1,963 investors. Reg CF initially allowed compa- nies to raise up to $1.07 million in a 12-month period from both credited and non-accredited investors. That limit was raised to $5 million in 2021. Under Reg CF, there are fewer disclosure requirements with the SEC, which cuts down on compliance costs. However, companies must file an annual report and provide Frank Milone Alec Shkolnik Swami Venkat

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