I'm not really sure how I feel about a lot of this, and think I should probably wait until I have a chance to learn more before trying to make a decision. However, I thought I would respond to at least part, if for no other reason than to get a discussion going.
Before I get started, could I ask for a definition of "grassroots"? I've heard the term thrown around a lot, and cobbled together an idea of what it means, but would be really grateful for a precise definition.
I agree that the way to establish the party is to concentrate on smaller races and slowly work our way up. However, I've always been a fan of attacking any given problem from multiple directions. You then always have a foothold to keep you moving forward even if one plan fails. In that light, I don't think that money was wasted on the TV commercials that were put out in the Badnarik campaign. I'm going to support that with some anecdotal evidence (bad form, I know, but bear with me).
Four years ago, I helped install Satan as the new religious extremist and dictator for life (ie: I voted for Bush). This vote was cast in ignorance, and in trust. I didn't have the knowledge that there were third parties, nor did I understand that a candidate may not always uphold the exact principles of his associated party. The trust was in my family, and mostly my brother, who convinced me that I was Republican. He insisted that Republicans stood for smaller government and less taxes, and even then I understood the economic and social advantages of that goal.
Part of the problem was that I understood the corruption and dishonestly inherent in politics. It had never occurred to me that there might someday be a honest politician with integrity and intelligence though. So I gave up on politics in general. I didn't learn anything new, I forgot what I already had learned, and I made no effort to follow politics as a whole. After all, you either voted for the Democrat or the Republican, and everyone knew that they both cheated and lied, right?
Two years ago my wife (fiancee at the time) sent me a link to the "worlds smallest political quiz". I had heard the word "Libertarian" before, but this was the first time I was able to associate any values, ideas, or description with it...I didn't even realize they were a political party like the Republicans and Democrats! It didn't take long of looking over the website to understand that, even though I didn't know it, I was definitely a Libertarian.
In the time since, I have talked to everyone I know about Libertarians and their ideology at one point or another. There are a few things I have noticed. First, most people agree with Libertarian ideas, but fall prey to the 'wasted vote' syndrome. Second, Most people who know a bit about politics and are already affiliated with Republicans or Democrats are very unlikely to convert. Most importantly, people like myself, who are optimistic about the future, who believe that there is always hope, and who have almost no political knowledge, are the most likely to openly listen and evaluate Libertarian ideas you present and take the time to consider affiliated with the Libertarian party.
The TV ads run for Badnarik weren't intended to just beg for a vote. They presented the ideology and philosophy (in a 30 second blurb) to thousands upon thousands of people. Many of whom aren't like you, or like I am now, but are very much like I was. Some of the people who saw those ads never knew that there were third parties. They never considered that there might be a party that represents their views, and never took the time to take part in politics because neither the Democrats nor the Republicans offer much other than larger government. These are people who now have a new word, "Libertarian", floating around in their head, and I'm confident that at least some of them are going to find the LP because of it.
This is important because many of them, like me, probably never paid any attention to the local races. If you had channeled that money into a local race, you would never have earned my vote, because I simply wouldn't have cared enough (back then). However, had you gotten word about the Libertarian party out to me, and piqued my interest enough that I would visit the site and learn more, then you would end up with a dedicated and optimistic fellow party member who would not only vote for the LP local candidates every chance he got in the future, but would also contribute time and money to the party.
Whoops, that took longer than I thought to write, back to work now...