Giving isn’t what it used to be.
Charitable fundraising has undergone significant changes over the past three decades. Before the technological revolution of the 1990s, fundraising solicitations of small donors were slow and very expensive. Nonprofits relied primarily on direct mail or phone solicitations. Fundraisers had to collect contact information for donors, rent mailing lists to expand their own, have letters and brochures printed, and stuffed and mailed envelopes using the Postal Service.
The principal alternative to sending letters was to hire call centers or commercial solicitors to call known donors, or cold-call prospects by phone to make a pitch for donations.
The advent of email and the Web 2.0 changed fundraising fundamentally. Email solicitation proved highly effective at a mere fraction of the cost of direct mail, and organizational websites were an easy and convenient way for donors to find information about charities and to make donations.
Social media then opened up additional avenues for nonprofits to engage donors and prospective contributors interactively, and use social networks to cast wider nets. Technology had significantly changed the face of small donor fundraising, making it fast, cheaper, and considerably more effective within the space of only a few years.
At the same time, and at least partially fueled by the technological advances in fundraising, the total volume of philanthropic giving kept increasing to nearly $300 billion in individual giving per year. Yet the nonprofit sector has also grown in size and economic importance and with it, the multitude of social, educational, cultural, and other needs that the sector serves.
As a consequence, the share of private giving and philanthropy on total nonprofit revenues is continuously declining, as the growth of charitable giving cannot hold pace with the financial needs of the nonprofit sector.
Crowdfunding, one of the more recent technological developments of the emerging digital platform economy, holds considerable promise as a potential breakthrough in terms of developing much needed new philanthropic revenues for chronically underfunded nonprofits. After all, crowdfunding seems in many ways the continuation of fundraising with other means.
In both cases, large numbers of prospective supporters “in the crowd” are brought in contact with the nonprofit organization and its programs in hopes of raising funds in typically small tranches. While crowdfunding also requires marketing and social media support, it requires less active solicitation of donors and prospects than traditional fundraising. It also is not restricted to prospects whose contact information is known already.
Moreover, it is a low cost/low risk tool that is as easily accessible to established nonprofits as it is to new charities that do not yet have sufficient resources to launch a sophisticated fundraising program. After direct mail and phone solicitations (Fundraising 1.0), and email and web and social media presence (Fundraising 2.0), crowdfunding has the potential to develop into the next iteration: Fundraising 3.0.
Not all forms of crowdfunding are entirely suitable for nonprofit purposes though. Wendy Chen, a Schar School of Policy and Government public policy doctoral student researching the issue, explains that there are three major types:
- Some crowdfunding platforms are equity based, typically requiring substantial investments and offering investors ownership shares in successful ventures. While these could potentially benefit some social enterprises or hybrid organizations in for-profit form, it is principally for commercial rather than social purposes.
- On debt-based platforms, like the microloan site Kiva, users make loans to beneficiaries which are expected to be paid back.
- A third type are rewards-based platforms like Kickstarter, where supporters may receive rewards in exchange for their financial contribution, which may range from trinkets to access to products to “a warm glow,” where nonprofits seek essentially donations for their work.
As a still emerging tool of social finance, enthusiasm about crowdfunding is great; the belief in the potential of the crowd is substantial. However, at these early stages at least, crowdfunding is still far from being a panacea for the financial woes of nonprofits.
Despite the hype and quick growth, estimates of the overall size of the crowdfunding market place its volume at below $20 billion-per-year in the U.S. Even if all of it were devoted to social causes, it would only account for a very small fraction of the available philanthropic resources.
But are new resources flowing into nonprofits yet? Have nonprofits and social enterprises gained a foothold in the crowdfunding market, or are they lacking behind in exploring a potentially very exciting new form of revenue generation?
Somewhat surprisingly, the uptake of crowdfunding for nonprofit and social purposes is still a largely understudied issue. But Chen’s early research results, presented in her paper “Does Crowdfunding Benefit Social Entrepreneurship?” suggest that the vast majority of funds raised from the crowd benefits commercial applications—and nonprofits still have a long way to go in exploring and exploiting the possibilities that the crowd may hold.