Crowdfunding for social projects

16.10.2012 Blog

Crowdfunding  has emerged in recent years as an increasingly important source of grants and investment for new ventures. It involves using online platforms to pitch a proposed project to an online audience, often via video, and asking people to make a small donation to reach a target amount of funding. Drawing on the concept of crowdsourcing, the idea is for large numbers of people to pool their money to invest in an idea. For example at Indiegogo.com, people working on a range of film and media projects propose their idea in order to advertise for funding. Unlike charity donation platforms, crowdfunding sites can only take money from interested parties if their project reaches its total fundraising target within a set time period. Further, many platforms also require entrepreneurs to give some form of reward or incentive to those who choose to invest in their project. While  some of these take the form of monetary returns as with traditional investment, many projects offer  alternative rewards such as exclusive merchandise and email updates on how the project is progressing (for example, a project might offer to name the funders on their album acknowledgements or to send them a limited edition print).

Crowdfunding platforms are a relatively recent development but have seen a major growth as start-up businesses become increasingly frustrated with traditional means of gaining financial support. Originally focusing largely on art projects, these platforms have been extended to a range of fields including technology goods. There are some dramatic examples of how crowdfunding can be used to raise large amounts very rapidly. For example, Project Eternity (a role play computer game) reached its target of $1.1 million less than 24 hours after it was posted on Kickstarter. Governments have also shown support for this emerging phenomenon – the UK legalised crowdfunding two years ago and the Obama administration this year introduced the Jumpstart our Business (JOB) Act which eases federal regulation allowing businesses to accept small contributions from private individuals.

The success of crowdfunding in the commercial sphere has led to a number of social entrepreneurs and innovators using this method as a way of getting their projects off the ground. For many social projects, government cuts and the language of cash-flow liquidity and financial returns of venture capitalists make traditional sources of funding difficult to acquire. Sites such as Spacehive (a platform for crowdfunding neighbourhood improvement projects) and Buzzbnk (which supports a wide range of social ventures) are providing an alternative source of funding. These platforms are an effective way for social entrepreneurs to test their ideas against public opinion and to develop a good customer base prior to release of final project. They also provide valuable market exposure.

However, with the growth of crowdfunding platforms comes growing criticism and scepticism. There have been some high profile projects which have repeatedly extended their launch dates and in some cases failed to launch resulting in loss of money and online investors. Other projects struggle under the pressure to fulfil the requirements and obligations they have made to the crowd that funded them.  The project Diaspora (an alternative social network site to Facebook) has become a well known example of this failure to anticipate the requirements of the crowdfunding process. The creators were unable to cope with the overwhelming support for the project, in which they gained $190,000 more than their target goal. Ultimately the project became unmanageable and they failed to release it publically. This case has fuelled considerable criticism about the reliability of such an approach for investors. Increasingly, it is becoming clear that specific skills and responsibilities are integral to the crowd funding processes and something that start-ups need to have addressed prior to undertaking the crowdfunding process.

More recently criticism has focused on issues surrounding accountability. A number of projects have been less than transparent about how the money they have raised has been used and in some cases where the project has failed, those who paid into it have not been refunded.  While crowdfunding platforms such as Kickstarter take a percentage of successfully funded projects, they argue that they have no legal responsibility to ensure that individuals receive the correct, or indeed any, returns. This has prompted claims that these platforms make individuals increasingly vulnerable to abuse by fraudulent organisations with no intention of fulfilling their proposed project or providing any return for money invested.

Despite these criticism platforms are continuing to raise huge amounts for new projects with Kickstarter alone raising nearly $300 million for projects in the US. Crowdfunding remains popular and a large number of projects have used it very successfully. There are also significant advantages to the crowdfunding approach beyond gaining funding. These platforms allow projects to gain substantial publicity and support for a project, demonstrating appetite and potentially helping  to secure further funding from more traditional sources.  Whether crowdfunding continues to be a viable alternative source of funding will depend on how well entrepreneurs and innovators can inspire trust in online communities.