Crowdfunding blurs the lines between donation and investment.
When Music Millennium owner Terry Currier needed money to fix the store’s leaking roof, he concocted a publicity stunt with a friend from the radio station 94.7. They planned to camp on the roof. It promised to be a harrowing experience —30 mph gusts buffeted their tents.
But they abandoned the effort when Currier checked his computer that morning. He had the money, $60,000. The final dollars had just rolled in, from Kickstarter backers.
Not so long ago, people might have thought twice about donating money to a for-profit company. But in the few years since crowdfunding debuted, thousands of companies have used online fundraising platforms to get their startups off the ground. And as the platforms mature, their broader impact is becoming clear: Crowdfunding has blurred the lines between investing, product purchases and charitable donations. The tool is also driving nonprofits and for-profit businesses toward a similar fundraising approach.
Music Millennium owner Terry Currier / Lisa Bauso
Nonprofits have entered the crowdfunding game with enthusiasm. This month crowdfunding site GoFundMe added CrowdRise, a feature specifically targeted at nonprofits.
But some nonprofits lag behind for-profit crowdfunding campaigns as consumers give more to businesses and individual causes, no matter how outlandish. Current crowdfunding campaigns include saving Toys R Us and funding porn star Stormy Daniels’ lawsuit against President Trump.
“It can siphon money away from charitable causes for what are individual causes or needs, or investments,” says Jim White, director of the Nonprofit Association of Oregon, in a reference to crowdfunding. “There is competition that is created."
Whether nonprofit or for-profit, the most successful crowdfunding campaigns promise consumers, donors or investors (distinctions between these terms are starting to blur), a reward for their contribution. That might be a climbing gym, renovated record store or kegerator that originated in their neighborhood. In this way, crowdfunding sites are like farmers’ markets on steroids.
“It’s not quite charity,” says Zac Rubenson, a Portland-based freelance designer who raised $52,480 to date on Kickstarter to create a spork. “It’s more analogous to buying a piece of art from the Saturday Market.”
“It’s not quite charity,” says Zac Rubenson. “It’s more analogous to buying a piece of art from the Saturday Market.”
On crowdfunding sites, investments and donations pool together in murky waters. It can be difficult to distinguish the two, especially in the case of for-profit local businesses begging for funds to save a community landmark, a la Music Millennium. Backers don’t get a tax write-off, but they get a pint glass, a t-shirt or $100 worth of vinyl. (Crowdfunding should not be confused with community investment offerings that give donors an financial stake in the company.)
And in some minds, saving a business down the street yields a more tangible emotional payoff than fighting a disease in Africa. Backers pledged $315,346 to nonprofit Hollywood Theater for its campaign to save Movie Madness, the Portland video store. Donors pledged $125,250 to preserve the Alberta Rose Theater.
“I may not need this growler because I don’t drink beer, but I feel for this company," St. Marie says. "They just get a piece of your heart and you want to support them.”
Plenty of savvy nonprofits, White says, have caught on to the crowdfunding strategy. It just requires a pirouette in strategic thinking. Sell the cause with the immediacy that drives home a crowdfunded product.
Natural disasters, of course, prompt nonprofit giving on crowdfunding sites. But nonprofits without an immediate event can create one by pointing to recent research or news coverage that brings attention to an issue.
“When a nonprofit can show the impact and urgency of their mission, that’s an effective way to capture attention,” White says. “you can pivot information you have that is unique.”
Just as crowdfunding forces nonprofits to act more like startups, it also compels startups to act like nonprofits. They must craft an emotional message to generate support. Investor Terry St. Marie, launched Built Oregon, a storytelling site devoted to local businesses, in part through a kickstarter campaign. He gives his own crowdfunding dollars to businesses that tell an emotion-driven story, even if he won’t use the product.
“It’s pulling on strings,” he says. “I may not need this growler because I don’t drink beer, but I feel for this company. They just get a piece of your heart and you want to support them.”
Entrepreneurs with a strong emotional message can upend traditional business models. Crowdfunding flips the classic entrepreneurial script—instead of making a quality product and figuring out how to sell it, sell the idea first, then leverage the crowdfunding dollars to make it. Rubenson could have secured a loan for his spork. But instead, he spent his time and resources on marketing videos and materials.
“It just took an immense amount of effort,” he says. “We had to double down on how to get as much exposure as possible.”
How crowdfunding changes product development
A well-marketed crowdfunding campaign earns revenue before product development starts. This approach can fund products than otherwise would never make it to market because of their high startup costs. Salem climbing gym Rock Boxx, owner Cole Clarke said, was able to secure a loan because the bank was impressed with the public support from his Kickstarter campaign.
But at other times, the marketing-first approach has devastating results. Look no further than the Coolest Cooler scandal. In June, the Portland maker of a cooler with built-in blender and bluetooth speaker sent a very uncool message to his supporters. He had promised them a cooler for their $185 gift, but wrote they might now need to wait another three years to receive their reward, due to manufacturing and supply chain issues.
Currier nearly failed to deliver on his promised kickstarter rewards, when the new mini-bar he included in the fundraising campaign turned out to be more expensive than he thought. “I still owe these Kickstarter people,” he recalls thinking this past Fall. “I have an obligation to them. I told them I was going to do this.”
Currier managed to pull through by placing the bar in an existing area, instead of building out a new space like he originally planned. But the close call taught him a lesson about Kickstarter’s perils.
“If somebody doesn’t give back those kickstarter rewards there’s quite an upheaval,” he says. “I could have been lynched or something, but there’s enough goodwill in the community that didn’t happen.”
The public is increasingly bestowing its goodwill on businesses like Music Millennium because they’ve capitalized on the fundraising approach of nonprofits. But crowdfunding also reflects larger trends toward for-profit giving. Foundations like Oregon Community Foundation are now embracing “mission related investments” to startups and venture capital firms.
Like St. Marie, many of the business owners who met with success on Kickstarter return the favor by donating to other for-profit causes. Currier gives to local bands and music projects, Rubenson to climbing documentaries from local filmmakers. They still give to nonprofits, but find crowdfunding a useful way to prop up local enterprise.
“If I was Walmart and came up with a Kickstarter it would never go down,” Currier says. “People within the community want to support local business they feel are essential to the community.”
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Melissa D. Freeman Wednesday, 28 March 2018 09:51 Comment Link
Crowdfunding is a helpful source of capital for Oregon businesses, but it is different from the types of investments that The Oregon Community Foundation is making. Our Mission Related Investments expect a financial return along with the social benefit of supporting Oregon companies. Learn more about our work in this Economic Vitality Report: https://www.oregoncf.org/Templates/media/files/jobs_and_economy/economic_vitality_2010_2016.pdf