Crowdfunding is officially big news – but what is it and why does it work? Jason Potts and Nick Burne investigate

When defining crowdfunding, it’s first important to have a look at its history.

Crowdsourcing – the precursor to crowdfunding – was officially born in 2005, when Wired magazine journalist Jeff Howe coined the term to describe the process of outsourcing a task to an undefined public.

Prior to this, however, lots of activity was happening that could be loosely defined as crowdsourcing – most notably, the launch of Wikipedia in 2001.

By the end of that year, sponsorship website JustGiving had been used by 2.6 million people – a sure sign of the power of peer-to-peer fundraising online – while the launch, in 2008, of Cancer Research UK’s MyProjects website proved a similar success.

Today, it’s not just charities that are harnessing the power of crowds. With the help of 25,000 supporters, cult US musician Amanda Palmer raised $1m on Kickstarter to fund her new record. And, with Kickstarter UK having launched in October, crowdfunding is now officially centre stage.

Different guises

Crowdfunding can take many forms. The first of these is people grouping together to back an idea or charitable project, with no direct material return offered to those making the pledge. These are either set up by the charity (MyProjects) or by the individuals themselves (JustGiving). Fundraising can be solicited for lots of different projects or a single thing, such as an advertising campaign, as demonstrated by Amnesty International in many different countries.

Similar to this is when organisations ask their supporters to donate to something very specific and unique. An example of this is Greenpeace’s campaign to help fund the new Rainbow Warrior by breaking down the new boat into its constituent parts: rivets, anchors, etc. Also in this category is the idea of pledging a day each year on which to fund a particular organisation’s running costs.

Another approach invites a display of sponsorship in return for the cash pledged, either by individuals, companies or groups. The Million Dollar Homepage (www.milliondollarhomepage.com) – on which companies can buy a pixel of internet advertising space for $1 – is a successful example of this.

Alternatively, the money donated can be a loan, which will then be paid back by the beneficiary. This was the approach adopted by Kiva (www.kiva.org) a charity battling global poverty. Interestingly, only about 1% of donors who sign up to such a scheme ever ask for their money back; the rest re-invest.

For smaller charities, using a crowdfunding site to show how close you are to a big total can act as a great incentive for donors. For example, the JustGiving page for Molly’s Fund – which is raising money for a brain tumour unit in memory of Molly Lane Fox, a five-year-old who died from a brain tumour in 2008 – acts as the focus for showing the fund’s progress and motivating more giving.

Why it works

Crowdfunding is ‘of the moment’ because it strongly aligns with some important societal trends that are influencing online giving generally.

The first of these is transparency: people’s desire to get as close as possible to the things they are giving to, and to see that they are making a difference. The second is choice: giving people the ability to choose and be creative about how they raise money. The third is the rise of social media: having the tools at your fingertips to show and share what you are doing with your existing and extended social networks. And the fourth is ‘gamification’: using game-like mechanics – unlocking the latest badge in Foursquare, going up a level in Runescape – to reward online audiences for their efforts.

Given these factors, where crowdfunding gets exciting isn’t with your current donors. It isn’t even with their friends. It’s the next tier out: the friends of the friends of your current audience. If we assume that people are, in the main, friends with the same broad demographic profile as themselves, getting them to fundraise for you makes perfect sense.

And crowdfunding platforms are further evolving to enable individuals to create their own online fundraising crowd, specific to their chosen cause. Some platforms, such as Crowdrise, are open to a variety of causes; others are more specific.

This move would suggest that crowdfunding is becoming more mainstream, and that users are not only more aware of crowdfunding as a fundraising experience, but that the expectations when supporting a cause are increasing. Donors will expect higher levels of engagement with a cause they choose to support: they will want to be able to specify where their donation is used, connect with other like-minded donors and receive regular updates from the project.

The challenges

It all sounds too good to be true, right? All things have their downsides – and crowdfunding is no different.

One challenge comes around restricted income. If you are saying that the money will go to that specific project, what challenges does that present? Do you need to include something in the wording around a percentage going to core funds? Is it even possible to say that the project will not happen without the funding?

Another is around resources. When you invite people into a conversation, as is the case with this type of fundraising, you need to make sure you have the staff or volunteers to respond to whatever might come out of it, as well as the content to make sure that people stay engaged with the project during and after it’s been funded.

And then there’s the problem of control – if you are using third party platforms to do your crowdfunding, what control of the look or the user experience are you prepared to give up?

Five key characteristics of crowdfunding

• People coming together to jointly fund a specific project(s) or initiative(s) 
• Can be focused around important dates (like someone’s birthday)
• Accountable and transparent (specific amount needed for a specific purpose)z
• Usually spread through online social interactions: people don't have to know each other to do this
• Time-limited or structured to a deadline/in-built conclusion of some kind

Jason Potts and Nick Burne, THINK Consulting Solutions

This article first appeared in The Fundraiser magazine, Issue 24, December 2012