Crowdfunding for the Benefit of the Public

Crowdfunding for the Benefit of the Public

Crowdfunding for the Benefit of the Public

Crowdfunding platforms offer a rich vein of inquiry about the implications of digital infrastructure for civil society. Since their early development in the creative arts during the mid-2000s, these online systems for funding projects via smallcontributions from many peoplehave grown in number and reach.

The best-known examples in the United States Kickstarter and Indiegogo, which focus on creative efforts (films, music, art exhibits) and product development from bicycle tools to virtual reality gear and….

There are dedicated platforms for specific beneficiaries (DonorsChoose), types of projects (Kiva for microloans) and geographies.

And the latest set to debut is Rob Towles’ SmashFund,Pbc, SmashFund is an invitation only  company that uses the power of a revolutionary social algorithm to build a community which can help fund passions and projects.

Mr. Towles has taken an age old system that most network marketing companies use for money flow and implemented it into online crowdfunding, brilliant.

Crowdfunding platforms that enable equity investments in small and medium enterprises are growing, especially since receiving legislative support via the JOBS Act in Y 2012.

Crowdfunding platforms are growing in number and popularity with people who want to make something happen and people who want to contribute financially to certain issues.

Here I explore the theoretical and practical applications of crowdfunding in cases of funding civic or public goods and in philanthropy.

This examination reveals several central themes, as follows:

  1. The algorithmic component of these civic crowdfunding platforms introduces a new dynamic into the decision-making processes. Where these platforms are being used as part of public processes, they require a level of visibility, transparency and scrutiny on at least on par with other democratic decision making procedures.
  2. Crowdsourcing is not the same as crowdfunding. Whereas crowdsourcing may expand the array of options for public pursuit, it may draw ideas and perspectives from vast numbers of participants. In this respect, crowdsourcing has clear epistemic benefits. But crowdfunding, by contrast, is mainly or exclusively about money. The primary benefit is not knowledge or knowledge aggregation; it is financial. This introduces a potentially limiting element,  that of money. Designing these systems and their use to align with democratic goals for participation requires careful attention.
  3.  From the standpoint of philanthropy, rather than democratic decision making processes, institutional philanthropy , namely foundations have several goals for crowdfunding that reach beyond financial resources, including knowledge gathering, community participation, and organizational capacity building. Crowdfunding platforms are particularly interesting from the perspective of digital civil society because they so easily blur the lines between what were once distinct activities, such as charitable giving, investing, product purchases, and, with civic options, tax paying or voting preferences.

The research looked at crowds as a resource for funding goods typically provided by municipalities, such as gardens, parks, bike lanes, and other infrastructure.

Civic crowdfunding platforms that focus specifically on providing public services or infrastructure are few in number and in small in reach, but their aspirations are large. Neighborly, for example, has as a goal redefining the multi-billion dollar municipal bond market.

Noting that American cities raise billions in dollars each year from the bond markets to finance their capital projects, the platform seeks to make some of that investment potential available directly to city residents. The goals are to make the financing system more participatory, less captured by big investment banks, potentially more expressive of citizen’s desires, and more flexible by decreasing the size of bond issuance and thus allowing for more community input into funding priorities.

Foundation use or support of crowdfunding platforms looks quite different according to the research.

Few foundations are building their own systems; instead most are running campaigns on top of platforms such as Razoo or Ashoka’s Changemakers.

Since foundations exist to distribute private resources for public benefit and their decision-making processes tend to be held within their institutional boards, these crowdfunding campaigns are optional extensions of the institution’s own responsibilities.

The most common foundation use of crowdfunding seems to be in the form of giving days, in which a local community foundation sponsors a 24 hour period of online donating, highlighting the opportunities to give, leveraging local media attention, and often providing a challenge grant match to the fund raised by local nonprofits.

While these Giving Days are often publicized in terms of the dollars they raise, frequently in the millions of dollars, the foundations that coordinate them speak as proudly of the role they play in raising awareness of local nonprofits and in generating new ideas from the community.

Some platforms are designed specifically to encourage idea generation and project submission from individuals, small businesses, and other “unusual partners” for foundations. In some cases, the goals are to help small organizations manage large marketing campaigns, adopt to online giving practices, and build a community of donors interested in ceratin issues.

There are several important features of crowdfunding platforms by or in itself.

  1. Platforms provide a template for presenting a project that includes a description of the project, its goals, its backers, and the amount of money to be raised.
  2. Most crowdfunding platforms use an “all or nothing” funding formula, so that only those projects that meet their total funding goal in the allotted time period will receive any of the pledged support. A project may raise more money than it asks for, but if it does not meet its target goal it does not get any of the funds pledged, others are not amount raised restrictived.
  3. The platforms themselves rely on software to display the projects on a potential donors’ computer or smartphone screen. The criteria used for that selection and display process are designed into the software algorithms, and are generally invisible to everyone but the platform owners. Meaning, that neither the project sponsor, the host of a particular campaign, or the potential donor will know the criteria by which specific projects are being shown at any given time. Search functionality obviates some of this, but not all, as search results are also displayed in some ranked order.
  4.  Most crowdfunding platforms offer potential financial supporters certain incentives, tiered to the size of their contribution. These can range from stickers to in-person meetings to naming options on the final project.

Crowdfunding platforms rely on projects that are posted from the public, but there is always a decision-making group behind the scenes making choices about what can or cannot be noticed on the platform.

In some cases, this is exclusively the province of the platform owners, who can determine it in the design and function of the platform itself.

By lending a project more or less prominence in the layout of the program’s user interface, owners can influence the visibility of specific projects. Likewise, the algorithms which govern the distribution of content to users and be used to offer more or less exposure to a project.

In other cases, such as with civic projects or foundation-managed campaigns, these selection bodies also include city officials or foundation staff.

Each of these parties may have different goals, motivations and definitions of success.

Some of these may be articulated clearly to the public and other participants, especially in terms of Giving Days or a foundation-supported campaign to generate new ideas about a particular issue.

Others, such as what goes into a successful project description or how to best “Tier” the incentives for donors are generally “known” only at the level of the software code that organizes projects once they’ve been put into the system.

The effect is that the software operation of the platform is itself a component of its quality of democratic character. Because they offer the public a chance for input and scrutiny on projects, it is essential that these programs themselves are also subject to public input and scrutiny.

Rodrigo Davies is the author of several papers on the potential and limits of using crowdfunding technologies for community or municipal infrastructure and is often credited with having coined the term Civic Crowdfunding., is a platform that aims to help cities issue bonds in increments that a local resident might afford, such as a few hundred dollars. The current bond market depends on issuing bonds in the tens or hundreds of millions of dollars as the primary buyers of municipal debt are investment banks., as an experiment, claims to be an additional financial option for cities that can raise more money while also lowering costs. It seeks to make investing in municipal debt easy and affordable, and also an expression of civic pride.

The Big Qs: Will a new source of funding for specific projects encourage cities to redirect their limited dollars to other needs?  When and how will this displacement work to expand the pool of financing, and when will it result in (short or) long-term responsibility displacement from the public sector to private financing ?

The 2nd question is equally important as it brings up the following Qs:

  1. Given the existing practices for local governments to gather input from and share budget priorities with the public, how can crowdfunding platforms be used equitably?
  2. Who will decide what projects get general funding, what bonds are issued for what kinds of work, and what bonds are made available on crowdfunding platforms?
  3. What public and institutional procedures and system design features are necessary to fold crowdfunding into city finance in ways that are participatory and additive and not discriminatory or displacing?

The Key question to be answered before cities deploy these systems is when, and under what conditions, does civic crowdfunding expand democracy?

Comparing the mechanisms of crowdfunding to extant practices can serve as a means of both designing and testing these systems. There are 4 useful reference points for consideration by both practitioners and researchers are participatory budgeting, they are:

  1. existing practices of voting
  2. representational budgeting
  3. tax paying
  4. crowdsourcing.

To the list of values that civic crowdfunding might engage, consider the role of deliberation in democracy and the associative nature of participation.

In their current state, crowdfunding platforms sum up individual participation as a signal of engagement. Missing in the platforms explicit designs are opportunities for people to come together, debate the issues, learn from one another, and deliberate about the choices.

Simply put, crowdfunding for civic projects equates voting with funding. You literally vote with your dollar. As one participant noted, there are actually 3 discrete processes at play , as follows:

  1. new technologies
  2. the private supply of public goods
  3. crowd based decision-making

The procedures and institutional choices to make them work need to work at and across at least these 3 levels :

  1. the community
  2. the managing institutions
  3. the software code

Access that depends on personal data subsidies, limited choices, or invisible beneficiaries are not democratic. Too often, institutional philanthropy has locked onto the sense that these technologies are democratizing because they have lowered the participation barriers for donors, but not necessarily for beneficiaries.

Other Key questions include what motivates people to buy the bonds?  How does money change the value and nature of participation?

As with all innovations, there is the possibility that changing the existing financing system, will simply introduce a new one with different faults.

The nature of the crowdfunding transaction itself is at odds with democratic participation. Unlike crowdsourcing, in which the transactional currency is ideas, which are both abundant and non-trivial, crowdfunding revolves around money, which is neither.

The 2nd frame focused on crowdfunding from the perspective of institutional philanthropists, specifically foundations and their associations. …highlighted their potential reach and limitations in terms of participatory democracy, civic engagement, philanthropic practice, and as knowledge creation mechanisms.

Given its genesis as a means of raising funds for concerts and art productions, many people think of crowdfunding as an inherently philanthropic act.

But one of the more significant elements of these platforms is that, while they aggregate individual financial contributions, they also comingle different kinds of financial actions.

What 1 person may see as a charitable donation to support a musical performance another might assume is a ticket purchase. Because the sites offer incentives at different contribution sizes, and because many people pay less than the actual price of the item, it is unclear whether they are making a charitable contribution and getting a sticker or simply purchasing a sticker instead of a ticket.

While tax deductibility may be a signal to some contributors that their money is “charitable,” others contribute simply because they want the event to happen or the record to get made, they’re just supporting the creation and public activity.

It is not always clear, to the contributor, the project lead, or the platform host whether their financial support is meant as a purchase, a donation, an investment or an alternative to a tax. The various external mechanisms we havecreated to distinguish these actions do not  automatically align with motivation.

Foundations have not, for the most part, relied on crowdfunding mechanisms as part of their work.

A few have encouraged their non-profit partners to host crowdfunding campaigns, and several private foundations have supported efforts by community foundations to host giving days.

As a distributed decision-making system focused on charitable projects, these platforms have generally been used to connect institutional funders to individual donors by virtue of placing the same set of funding choices before them.

Given this, the panel of institutional funders describing their work with crowdfunding emphasized the knowledge creation value of the tools, their role as signaling mechanisms, and their benefits to the nonprofits hosting projects on them.

The Knight Foundation, the Silicon Valley Community Foundation and The Packard Foundation all shared with HIP an interest in using these platforms and campaigns to build the organizational capacity of the nonprofits with whom they work.

Prior to the community foundation’s campaign, for example, most small organizations in Silicon Valley couldn’t process donations via credit card.

By hosting a well-publicized, community-branded giving day on an online platform that required credit card transactions, the CFSV “nudged” these organizations into setting up these basic systems. Packard, on the other hand, provides support to CFSV for the same Giving Day and sees its investment as building organizational skills on 2 levels , at the community foundation and for the local nonprofits.

The Knight Foundation has supported giving days in multiple communities where it works for many of the same organizational reasons. As a large foundation that also experiments broadly with crowdsourcing and open innovation challenges, the Knight Foundation sees crowdfunding as part of broader knowledge gathering/community building efforts around innovation, what Danny Harris called a “creative census.” For this reason the Foundation usually seeks input and supports projects from individuals and small businesses, as well as from nonprofits. The Foundation generally sets the question or the challenge, and then uses the lure of funding and the ease of crowd-focused tools for submitting ideas, voting on them, and providing funding as a way of both sparking new ideas and bringing visibility to them. These epistemic goals were also a driver of the Packard Foundation’s one direct experiment with crowdfunding, in which it put forth an issue-based challenge to anyone in the broad geographic area in which it works. The intention was to catalyze new ideas and help the Foundation reach beyond the non-profit community that it knows quite well.

Raising more money for their projects was not a primary concern of any of the foundation hosted crowdfunding efforts. This is ironic in that the platforms primary purpose is to raise money.

In part, this may be semantic, as the organizational capacity goals mentioned by each of the foundations had to do with the non-profits ongoing ability to use these technologies.

In setting up their crowdfunding experiments, foundations had generally focused on 3 possible roles:

  1. sourcing new ideas
  2. building organizational capacity
  3. providing matching funds to those raised by the non-profits.

Several questions emerged about these practices, some of which focused on the perceived benefits to the foundations and some of which focused more on the nonprofit beneficiaries.

In regard to the return to the foundations themselves, the limits of their engagement seemed destined to limit the possible benefits.

For example, underwriting a crowdfunding challenge or matching the funds raised struck seems an expensive way of gathering intelligence from the community.

The parameters placed on the campaigns by the foundations in terms of issue and qualification are significant, but underappreciated, factors in how the campaigns play out.

Compared to the more typical decision making processes of foundations, which are internal and opaque, these platforms represent a notable broadening of participation. Democratic decision-making is neither a requirement for foundations nor necessarily a goal, and these efforts reflect that.

From the perspective of participating organizations, foundation-supported crowdfunding efforts can expand participation.

Those that extend entry beyond exempt nonprofits do expand access to existing philanthropic resources beyond the norm. How well it enhances organizational capacity to do much more than process online transactions was in doubt, as there is little or no information gathered or shared from the organizations before and after.

Crowdfunding campaigns require an organization to master social media outreach, online marketing, and online transaction processing.

These are distinct skills that may or may not be the organization’s most critical areas for support.

From the foundations’ perspective, what are the ethics for foundations collecting data in this way? What should they collect and keep, what should they not collect, and what should remain with the community members from whom it came?

Once again, these questions apply to the platform vendors, whose technologies influence the display and sorting processes of the effort. And that begs the Q: who will have access to the data that the platforms collect on donors and from their behaviors on the site?

The existing research on crowdfunding, especially in the fields of computer science and engineering, can shed light on the technological elements of crowdfunding that differentiate it from other processes and that should be accounted for in any civic application.

These include features such as its streamlined refund process, the visibility of other projects, donors’ abilities to see other donors, and the abundance of data that it generates.

Now back to the crowdfunding of business the benefit the public.

Over the past 25 odd years I have heard a lot of people talk about how network marketing companies are scams and pyramid schemes, but these are people who have never in their life looked into how the money flows in network marketing companies for it they had, they would not be saying the negative things that they do. Warren Buffett, Bill Gates and Donald Trump have all extolled the opportunities and benefits of network marketing.

If you truly want to see how one functions, look up companies like Nu-Skin, Herbalife, Amway and see if you can talk to a representative. If network marketing was a scam, companies like Amway would have been shut down years ago. Network marketing works as a great business model.

Have a terrific week.

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