Crowdfundring: Grassroots funding for grassroots organisations?

KRISTIAN ROED NIELSEN är assisterande professor vid Copenhagen Business School och gästforskare på Mistra Center for Sustainable Markets vid Stockholm School of Economics. Hans forskning kretsar kring intersektionen mellan hållbara konsumtionsmönster och innovation. För närvarande undersöker han den potentiella rollen för ett »crowd« att skapa hållbarhet – något han även skriver om här.

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Crowdfunding represents a fast growing source of alternative finance for a variety of both for- and non-profit ventures that is changing how everything from personal loans to start-up investment is financed. What makes crowdfunding especially unique is that it requires that strangers are willing to support strangers for causes, products, or services that have not yet been realized and of which they have little direct oversight or control. Despite this, crowdfunding has grown enormously quickly from a total volume of 2.7 billion dollars in 2012 to 34.4 in 2015.

THIS RAPID GROWTH could also present a great opportunity for good causes to raise funds and awareness; however, at the moment there is a failure to make the most of this opportunity. Challenges include the lack of skills and capacity to set-up and run a crowdfunding campaign, the often short-term nature of crowdfunding campaigns, and finally trouble identifying how to mobilise individuals to support a given campaign.

Given the breadth of challenges we face as society the focus on grassroots organisations – or niche actors to speak in academic terms – on its face seem misguided. What possible difference can an individual make in tackling our current consumptive and productive patterns, which continue to challenge the planetary boundaries of our planet? Challenges like climate change, loss of biodiversity, and interference with the nitrogen cycles have already crossed their ”safe operating space” and thus require ”factor 10 or more improvements in environmental performance, which can only be realized by deep-structural changes in transport, energy, agri-food and other systems.”

Incremental improvements in technology are seen as insufficient in alleviating these systematic issues and the sustainability literature is increasingly calling for larger “socio-technical”. changes to tackle the threats posed to our planet’s ecological and social boundaries. Here the academics are increasing acknowledging the role that niche agents, not incumbents, have in spearheading change as they are seen to be more likely to develop novel ideas and innovations that challenge the status-quo. Niche actors – like sustainable entrepreneurs and grassroots organisation – thus represent the primary agitators of change and drivers of emerging radical innovation, because they have the freedom to deviate from the “locked-in” nature of the socio-technical system we inhabit. If crowdfunding could enable more niche actors it would be a welcome development. So what is crowdfunding?

THE CROWDFUNDING PROCESS itself can be characterized by the successful interaction between a facilitating organisation (or platform), a variety of campaign founders who seek financial support for their ideas and ventures, and a large dispersed “crowd” of individuals (“crowdfunders”) who are enticed to invest, pledge, lend or donate to these ideas and ventures. Although possible without a facilitating organisation, crowdfunding is increasingly enabled by platforms such as Indiegogo and Kickstarter that act as facilitators of the crowdfunding process in exchange for a commission.

These platforms have further inspired the typical subdivision of the crowdfunding process into four models depending on the nature of the funding: donation, reward, equity, and lending-based approaches.

In terms of enabling good causes each of these models has its respective strengths and weaknesses, but also projects that are more or less suited for it.

Firstly, donation-based crowdfunding is good for one-off small size projects that need finance, but can offer little in return. Th e obvious projects here are charity-led events as donations require a significant altruistic component in order to be enticing. On average, successful donation-based campaigns raise 3,500 USD.

Secondly reward-based crowdfunding is also good for one-off small to medium size projects that need finance, but can entice support via a number of perks that are tangible rewards for supporting a campaign. While reward-based campaigns can garner significant funds – Pebble Time for example raised 20.34 million USD – the average size of successful campaigns is around 8,000 USD. Reward-based crowdfunding can thus be utilized by both grassroots organizations and charities, but also sustainable entrepreneurs seeking finance for less costly product development and prototyping.

Finally equity and lending-based models are most obviously utilized by sustainable entrepreneurs and established social ventures. Successful loan-based campaigns raising between 8,600–96,000 USD depending on whether they are business or individual loans, while equity-based campaigns raise on average 615,000 USD. While charities do employ, for example, loan-based crowdfunding it often with the aim of enabling development, for example, Kiva.org provides a platform where individuals can lend money to diversity of projects in the developing world as form of microfinance.

»The majority of crowdfunding campaigns fail fast and early and notion that is easy to succeed with crowdfunding is wrong.«

THE MAJORITY OF crowdfunding campaigns fail fast and early and notion that is easy to succeed with crowdfunding is wrong. In all likelihood your first campaign will not be a success and while campaigns with altruistic goals are generally seen to be linked with higher success rates it is by no means certain. The factors that influence funding success for good causes are five-fold.

Firstly, while consumers are on aggregate more likely to support socially-oriented ventures – as compared egocentrically-oriented campaigns – environmentally-oriented campaigns often perform worse than their egocentric counterparts.

However, it has also been observed that individuals oscillate significantly in their pledging behaviour – for example different products seem motivate different pledging motivations. Specifically there is some indication that for fashion items, electronics and other “wearables” consumers pledge for egocentric reasons (i.e. style, make and color), while for other more outof-sight items social (i.e. fair wages) and environmental (i.e. recycled materials) values win the day.

Secondly, consider how much funding you are seeking and observe what other similar campaigns are asking – campaigns asking significantly more than the average will find it increasingly more difficult to garner funding.

Thirdly, location still matters even in a crowdfunding context thus engagement with the local community is often vital for crowdfunding success.

Fourthly, get your known supporters to fund your project early on – the longer a campaign is active with little to no contributions the less likely it is garner support. It is like an empty restaurant it signals poorly. With a typical lifespan for a campaign between 30 to 45 days – if you haven’t received funding in the first ten days odds are that the campaign will fail.

Finally, your personal network in addition to past experience with crowdfunding strongly influences the likelihood of funding success. Prior success with crowdfunding results 173 percent increase in expected funding, while failure results in a 17,7 percent decrease. Success breed success, while failure breeds failure.

CROWDFUNDING IS primarily for one-off projects – an event, making a product, setting up a community project – but after the initial success getting repeat funding for maintaining the given project presents a clear challenge. Enabling a community garden is an attractive proposition paying for maintaining an existing community garden is not. Because especially donation and reward-based crowdfunding focus on one-off support it represents more a flood of money rather than a steady stream. Thus crowdfunding can be exploited to enable a diversity of one-off projects, but as a stable long-term source of finance, it is a risky proposition for most good causes. Another challenge in relying on the crowd for finance is that the given aim of campaign has to be “attractive”. Hence campaigns focused on unattractive social issues may face challenges getting the support they need.

Finally crowdfunding often requires significant organisational capabilities and communicative skills in order to succeed. For established charities this may represents only a minor concern given their track record of successful fundraising, however, small grassroots organisations often lack the necessary skills and resources to create a credible campaign. For example, videos often represent a key component that individuals use to evaluate a campaign and thus the ability to make a professional looking video could represent a major hurdle for grassroots organizations.

 

KRISTIAN ROED NIELSEN
Forskar på förhållandet mellan hållbar konsumtion och innovation

KRN.MSC@CBS.DK

@ROEDNIELSEN

 

*Obligatoriskt

 

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