Why Crowdfunding Projects Succeed in the Charitable Sector
With the economic downturn squeezing lending, it’s becoming harder and harder to source loans from banks.
Whilst this might mean re-organising your personal finances, if you need the money for a business or charitable enterprise, the consequences can be far more significant.
This gap in the market left room for crowdfunding to emerge as the new boy on the block. It has quickly risen in popularity to become a major consideration, especially in the charitable sector. We take a look at the reasons why crowdfunding projects are quite so successful in this area.
How it works
For anyone not familiar with the principles of crowdfunding, it’s akin to borrowing a tenner off all the people you know, promising to give the money back and buy them a pint when things get better.
The idea is that it’s far easier to persuade lots of potential investors to part with a small sum of money rather than pitching to just one person for a far larger sum. Investors can contribute whatever amount they are able to and in return usually receive a share of the equity in the business, depending on the amount they invested.
In some cases, companies which turn to crowdfunding aren’t looking for monetary investment, but access to specialist skills or talents. They may not have the finances to pay for this kind of help and instead use crowdfunding to offer equity rather than a more traditional means of payment.
Crowdfunding is a classic example of a fundraising initiative
A different mentality
Crowdfunding works because it harnesses the desire for people to want to help their peers, whilst still making money.
Savings accounts are offering little or no returns and with the effect of inflation, leaving money in the bank results in a net loss in value. For this reason, speculative investors are turning to crowdfunding as a means of not only increasing their wealth, but also to enjoy the feel-good factor that comes with being part of a new and emerging project.
Any business can use crowdfunding but it is particularly popular amongst those looking to set up or grow. Being a part of the initiative from the beginning can engender a real sense of loyalty and commitment amongst investors, providing this type of lending with a very different feel.
It is for this reason that not all types of crowdfunding are a true investment where a tangible return is expected. In fact, in some cases, the only ‘reward’ is the warm fuzzy feeling an investor might get along with something like a shout-out on social media to say thanks. For this reason, it’s imperative for a potential investor to pick the right project to match what they want to get out of it.
Crowdfunding in the charitable sector
Charities and not for profit organisations have long relied on the goodwill of donors and investors so the ethos of crowdfunding fits perfectly with this sector. And although few will have the resources to offer substantial returns on any investment, they are still a very attractive proposition for any potential donor.
Studies have identified four distinct types of crowdfunding which can be broken down as follows:
- Donation based. The returns are intangible and rewards are social.
- Pre-purchase. Social motivation plus rewards.
- Lending. The loan is repaid with interest but there is the added kudos of social rewards.
- Investment. A more traditional type of crowdfunding, equity is offered which provides a financial gain if the venture succeeds. Rewards and social benefits help to boost contributions.
For obvious reasons, charitable organisations operate less in the last type of crowdfunding and more within the other three types. However, it’s not out of the question for some particular groups or campaigns – especially those connected with the arts – to be able to offer a financial incentive.
Crowdfunding allows charities to show investors and donors exactly where their money will be spent and how they will make a difference. Research has shown that in many cases this is enough to persuade people to part with their money, purely because of the social reward they get.
Charities which are the most successful in their crowdfunding ventures hook up with social media to ensure they not only reach the largest audience possible, but also that the community vibe is enhanced and amplified. This is without question one of the biggest rewards of joining a crowdfunding venture in the charitable sector.
Most people would like to feel they could make a difference, and the chance to play a real part in a charitable campaign is almost irresistible. Providing the means to contribute with the offer of returns or rewards – in whatever form – is a new concept for the charitable sector; previously it had been very much one-way traffic. Crowdfunding allows individuals to become involved by donating time, money or skills and to receive some form of gain as a result.