“Crowd-Funding in the Non-Profit Sector” – Patrick O’Reilly

April 17, 2014

The use of crowd-funding has quickly become an innovative tool for small entrepreneurs, who may be otherwise excluded from traditional venture capital, to raise funding for their business initiatives.

Patrick O’Reilly

 

A little known, but highly symbolic use of crowd-funding can be seen through the construction of the Statue of Liberty in 1885. Donated as a symbolic gift to the United States, the statue was ready to be accepted, but for one problem. The statue needed a $250,000 granite plinth to act as a pedestal, yet traditional methods of acquiring funding for the project had failed. It seemed that the project had run out of options, until the well known publisher, Joseph Pulitzer, used one of his newspapers to organize an innovative means of raising funds. The campaign managed to rally the readership of the newspaper to amass 160,000 donors to contribute whatever they could, with many of the donations being less than one dollar. There was a strong show of support for the project, and in just five months, enough funds had been raised to cover the entire cost of the pedestal, which ensured that the Statue of Liberty could be constructed.i

In the modern era, technology and the internet have allowed crowd-funding to become a popular means of financial support for organizations as well as individuals. Websites such as Kickstarter and Pozible provide online platforms to allow up and coming entrepreneurs the ability to connect with an audience of donors to provide funding for their new business initiatives and inventions. The premise is simple: an idea is pitched to the community stating what they hope to achieve and how much money they require. Donations are given to the project; however, if the target needed for the project is not met, the money is simply refunded to the donors.

The Global Financial Crisis in the late 2000s resulted in traditional financing institutions clamping down on high-risk lending practices, making crowdfunding a more attractive method for entrepreneurs to gain access to credit. It is estimated that the crowd funding market had raised $1.5 billion in 2011 alone, funding a diverse range of projects, from video game development to scientific research.ii

It was only a matter of time before the not-for-profit industry realized that this method of financing is an effective way to fund their objectives, with traditional access to financing often being very limited.

This gave rise to a number of websites specifically set up to provide crowd-funding support for community projects, such as the international GlobalGiving site, which connects non-profit organizations with sponsors. The utilization of these services has been vast, with websites such as GiveForward being set up to help people raise money for medical bills, and sites like Intragrad, which helps college students raise money for their education, also being established. Organizations generally need to seek approval from these sites to host their project, and if successfully funded, the online platform will be entitled to a certain percentage of the donations.

One instance of this method of financing being used successfully is the example of the non-profit organization Pollinate Energy, which aims to promote the spread of renewable energy sources throughout India.  Through the use of the online platform ChipIn, the organization managed to raise $10,000 over the course of a month to fund the training of local entrepreneurs in setting up their own renewable energy franchises.iii The use of crowd-funding allowed for speedy access to funds that otherwise may have taken much longer to obtain through government grants or other traditional fundraising methods.

While there are non-profit organizations that have specifically incorporated their core operations around the crowd-funding model, there are benefits available to existing non-profits who choose to implement crowd-funding strategies into their existing revenue stream.

The ability to move fundraising onto an online platform provides non-profit organizations with opportunities for cost streamlining, as traditional methods of revenue raising such as call centres or door knocking are labor intensive and therefore costly.

Instead of needing to rely on large-scale marketing campaigns, crowdfunding can be inexpensively directed at those who would be most interested in donating. In addition, as a result of using an online platform, the ability to find a sufficient pool of donors is much easier as the campaign will not be limited by geographical boundaries.iv Reducing administration costs also has the additional benefit of freeing up more revenue for the organization to spend on projects.

Furthermore, the utilization of crowd-funding gives the advantage of cash flow diversification. According to a survey of non-profit organizations by Deloitte, the average non-profit will receive 43 percent of its revenue from government funding. This stands in contrast to the 16 percent received through public campaign fundraising.v Implementing new fundraising techniques in the not-for-profit sector will reduce the reliance on government funding and in turn will make non-profit organizations less affected by changing government grant policies.

The decentralized nature of internet based crowdfunding also gives organizations more scope in the type of projects they are able to run. Initially, an organization may be constrained to funding projects that only appeal to the mass market, due to the difficulty of finding interested donors in the particular location of the organization. However, through online crowd-funding, it becomes much easier to find parties interested in providing for niche causes, as geographical constraints are removed.vi

Although crowdfunding is generally viewed as a donation based system, there is significant scope for it to act as a platform that closely mirrors debt and equity based lending, in which funds are expected to be paid back with an interest rate attached. One benefit that this may have for the not-for-profit sector is the ability to negotiate lower interest rates, as the investment, for each individual donor, is less risky than for a same sized loan backed by one investor. vii

The use of crowdfunding, however, does not exclusively limit the benefits to the recipient of the funds. Crowdfunding can also allow for increased transparency in the way that donations are used. One benefit of online fundraising tools is that they give donors an unprecedented ability to see where their money is going. Many of these sites allow organizations to interact with donors over messaging or update services, which allows people to be continually informed on the progress of the project, and also makes it possible for potential donors to be kept updated on future initiatives proposed by the organization.

The use of crowdfunding also provides the opportunity to break down information asymmetry between the donor and the recipient. It is generally a requirement that the recipient states exactly how the funding is to be used, and with continuous feedback as to the progress of the project, this method of funding increases the transparency of the operations of the organization. Ultimately it has been argued that these factors, along with the meritocratic approach to projects receiving funding, result in a more democratic approach to fundraising. Some platforms provide conditions on the funds that mirror those in the private equity lending system, such as giving voting rights on projects, and others even place emphasis on allowing lenders to provide their own feedback as to the operation of the project.viii

While crowd-funding is an effective and innovative service for non-profit organizations to fund projects that would normally have little hope of securing a bank loan, it is worth considering the pitfalls of this method of funding and the potential implications that it may have on businesses that use it.

Currently, the crowdfunding model places a large amount of trust in the organization to follow through with their plans. There have been several notable examples in the for-profit crowdfunding lending sector where businesses have defrauded their investors. One example was when a company named Magnus Fun almost defrauded $120,000 from investors after it was found to be offering a fake beef jerky product. These scandals have so far been confined to for-profit crowdfunding initiatives. However, as this method of funding matures, it would be reasonable to assume that government legislation will be required to respond to such threats, in order to protect donors.ix In the United States, the JOBS (Jumpstart Our Business Startups) Act is an example of legislation that attempts to specifically address crowdfunding and outline specific rules and guidelines to protect donors. Companies who choose this method of financing will also need to be aware that there is a risk that regulations may change. Therefore, companies who commit to this method of financing will need to follow closely how crowd-funding is being used or misused by businesses in order to better anticipate any regulatory changes.

Crowdfunding is also not the quick fix to a non-profit organization’s financial problems, despite it often being touted as a magic bullet solution. Ultimately, crowdfunding does not offer a sustainable source of cash flow. Its advantages lie in providing funding for specific projects, rather than day-to-day operational costs. Therefore, crowdfunding should largely be seen as a secondary source of income for non-profits. If a non-profit organization is not structured in a way that allows it to maintain long-term financial health, then any contributions made through crowdfunding will ultimately have little long-term impact.  This source of funding does, however, provide non-profit organizations with another tool to promote awareness of their goals and collect much-needed donations to further their cause.

 

References

i  Peter Baeck, Liam Collins and Stian Westlake S, Crowding In: How the UK’s Businesses, Charities, Government, and Financial System can make the most of Crowdfunding (Nesta, 2012).

ii  ‘Bring Renewable Energy to India’s Urban Poor’ Chip In Australia <http://www.chipin.org.au/project/PollinateEnergy/>

iii  National Roundtable of Nonprofit Organizations, Survey into the Not For Profit Sector 2012 – Fundraising (Deloitte, 2012).

iv Ibid.

v  Matthew Hollow, ‘Crowdfunding and Civic Society in Europe: A Profitable Partnership?’ (2013) 4(1) Open Citizenship 68.

vi  Peter Baeck, Liam Collins and Stian Westlake S, Crowding In: How the UK’s Businesses, Charities, Government, and Financial System can make the most of Crowdfunding (Nesta, 2012).

vii  Matthew Hollow, ‘Crowdfunding and Civic Society in Europe: A Profitable Partnership?’ (2013) 4(1) Open Citizenship 68.

viii  Deborah Jacobs, ‘The Trouble With Crowdfunding’ Forbes Online (17 April 2013) <http://www.forbes.com/sites/deborahljacobs/2013/04/17/the-trouble-with-crowdfunding/>