Crowdfunding for Public Goods and Philanthropy

An examination of civic crowdfunding written by Lucy Bernholz, Rob Reich, and Emma Saunders-Hastings

with contributions from James Doucette

www.pechakucha.org/

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 small contributions from many people have grown in number and reach. The best-known examples in the United States might be Kickstarter and Indiegogo, which focus on creative efforts (films, music, art exhibits) and product development (everything from bicycle tools to virtual reality gear and beyond). There are dedicated platforms for specific beneficiaries (DonorsChoose), types of projects (Kiva for microloans) and geographies. Crowdfunding platforms that enable equity investments in small and medium enterprises are proliferating, especially since receiving legislative support via the JOBS Act in 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.

This report explores the theoretical and practical applications of crowdfunding in cases of funding civic or public goods and in philanthropy. This examination yields several central themes.

One: 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.

Two: 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.

Three: 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.

Public Goods

Example of crowdfunding for public goods from the Netherlands

First, we 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. Neighbor.ly, 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 (potentially) allowing for more community input into funding priorities.

Foundation use or support of crowdfunding platforms looks quite different. 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, such as Hispanics in Philanthropy’s HIPGive efforts, the goals are to help small organizations manage large marketing campaigns, adopt to online giving practices, and build a community of donors interested in Latino issues.

There are several important features of crowdfunding platforms per se.

One: 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.

Two: 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 doesn’t meet its target goal it doesn’t get any of the funds pledged.

Three: 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. In other words, 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 — but not necessarily transparent — order.

Four: 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 drastically 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 slightly different goals, motivations and definitions of success. Some of these may be articulated quite 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, however, 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. Neighbor.ly, where Davies now works, 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. Neighbor.ly, 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.

Introducing his past research and current work, Davies pointed to two significant questions about civic crowdfunding:

1. Will it defer investment by public agencies?
2. Will the rich get richer?

The first question is common to all discussions of private funding for public goods. 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 second question is equally important. 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? 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? 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?

Democratizing?

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. Three useful reference points for consideration by both practitioners and researchers are participatory budgeting; existing practices of voting, representational budgeting and tax paying; and crowdsourcing.

To the list of values that civic crowdfunding might engage, we might also 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. Much of the research and debate about digital systems in general focuses on this question of atomization versus community building. Is there a way for crowdfunding to encourage associational actions and deliberation, rather than simply using the digital tools’ capacities to segment issues into ever-smaller bits and distribute them more widely?

Crowdfunding appears to rely on the general idea is that if people work with their neighbors to fund a local project, it leaves a “residue” of trust or social connections that enable better collective action in the future. The flip side is it that these platforms instead diminish public trust and further fragment communities as they no longer need to get to the negotiating table to compromise and support public goods that benefit larger groups of people. Rather than support taxes to build parks around the city, the platforms help divert resources to build nicer parks in specific neighborhood. Since the answer to this is unknown, cities have two options — design to avoid this second set of outcomes and/or abandon the use of such platforms if these outcomes come to bear.

Simply put, crowdfunding equates voting with funding. You literally vote with your dollar. Given that this is undemocratic by definition, cities and civic platforms need to design municipal crowdfunding in ways that veer far from their applications to product development. As one participant noted, there are actually three discrete processes at play — new technologies, the private supply of public goods, and crowd based decision-making. These may all come together but they can also all pull apart. The procedures and institutional choices to make them work will need to work at and across at least three levels — the community, the managing institutions, and the software code.

Democratizing is a term that is applied to distributed technologies in a far too facile a way. Access that depends on personal data subsidies, limited choices, or invisible beneficiaries are hardly democratic. Too often, institutional philanthropy has locked onto the sense that these technologies are democratizing because they’ve lowered the participation barriers for donors, but not necessarily for beneficiaries. Civic crowdfunding may be poised on the edge of this same rhetorical trap.

Other key questions, which we will only be able to answer should an option such as Neighbor.ly become widely available, include what motivates people to buy the bonds? How does money change the value and nature of participation? An advantage of crowdfunding platforms is that they generate the very data that can help answer such a question. However, designing the intervention so that independent research access to these data is possible without violating the personal privacy of individual citizens, is a challenge to be met on the front end of implementation, not as an afterthought. One participant noted that it’s possible to frame the passage of California’s Proposition 13 in 1978 as a 35-year (failed) experiment in crowd funding public schools. If you use this as a hypothetical point of comparison, what is necessary to make the result of a technologically distributed funding reallocation process different?

As with all innovations, there exists the possibility that changing the existing financing system, will simply introduce a new one with different faults. Crowdfunding municipal bonds raises some predictable challenges such as issuing bonds in such small segments that big projects can’t get completed, building systems that are inaccessible to or discriminate against certain segments of the population, and creating new sources of data to be secured and managed in ways that protect personal privacy and meet the democratic ideals of transparency and public scrutiny.

It’s possible that the rhetorical trap of democratization can be avoided through deliberate design focused on equity, participation, access, and scrutiny. But the nature of the crowdfunding transaction itself may simply at odds with democratic participation. Unlike crowdsourcing, in which the transactional currency is ideas, which are both abundant and nontrivial, crowdfunding revolves around money, which is neither. Both processes also require significant amounts of time from all concerned.

Philanthropy

The second 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 one 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’ve created to distinguish these actions (namely tax deductibility) don’t 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 nonprofit 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.

Some of the efforts underway are quite comprehensive. Hispanics in Philanthropy, with support from the W.K. Kellogg Foundation and others, have built a custom system, HIPGive. Three goals take precedence — helping nonprofits learn how to use these systems for their own campaigns, building a community of people interested in Latino issues, and changing the public narrative about Latinos to a community of givers. The staff from HIP spend a lot of time providing technical support to the nonprofits, they organize issue-specific campaigns about education or health, and they fundraise to underwrite the costs of both the technology and the technical support.

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 two 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 nonprofit 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 nonprofits ongoing ability to use these technologies. Where once foundations might have sought to build nonprofit fundraising capacity by supporting the hiring of a development staff person, they were now shifting that support to fit today’s technology. In setting up their crowdfunding experiments, these foundations had generally focused on three possible roles: sourcing new ideas, building organizational capacity, and providing matching funds to those raised by the nonprofits.

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. But 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. The Knight Foundation was clear, however, that simply opening the doors is not enough. It took many years and concerted outreach and marketing efforts for the pool of applicants to Knight-funded efforts to diversify significantly beyond its core community. How well it enhances organizational capacity to do much more than process online transactions was also in doubt, as there is little or no information gathered or shared from the organizations before and after (except in the case of HIP, which provides ongoing support).

It is also quite possible that these efforts at capacity building are more constraining than they appear. 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. What signals (intentional and otherwise) are foundations sending when they pay all administrative fees for the transactions? The incentives that go along with crowdfunding can spark some unintentional gaming of the system. Many nonprofits simply shift pre-existing fundraising plans to line up on the designated community giving day. That way they unleash the foundation’s matching funds on dollars they would have raised anyway, but otherwise don’t expand or shift their existing roster of supporters.

How well crowdfunding works as a knowledge gathering tool, and for whom, is also debatable. Again, as with civic crowdfunding, there are both process and technological considerations here. If foundations are essentially using these platforms as community research and development efforts, do they “owe” any of what they learn to the community from which it came? Are they extracting time and effort from well-intentioned participants, with no obligation of return, either in funding or information? If these campaigns do yield useful community insights should that information become the province, and/or property, of private foundations?

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 also apply to the platform vendors, whose technologies influence the display and sorting processes undergirding the entire effort. In addition, who will have access to the data that the platforms collect on donors and from their behaviors on the site?

Crowd Surfing

Both foundations and cities are exploring the use of crowdfunding platforms. While they play very different roles in a democracy, and have very different responsibilities vis-à-vis democratic practice, they share many motivations for their interest. These include expanding civic voice, broadening access and participation, providing individuals with an additional form of civic action, serving as a new source of information, and raising funds for projects that benefit the public. Both types of organizations would benefit from an empirical study of whether crowdfunding efforts actually raise new and more money for these projects. The results of such research would help affirm or discredit the widely-held assumption that crowdfunding is both effective and efficient.

Where the other goals are concerned, cities and foundations share areas of inquiry, though the norms that need to develop should differ for public agencies and philanthropic foundations. It may well be that the effective use of crowdfunding platforms for enhanced civic voice requires different approaches and procedures than does using it to gather community information. As of now, most practice is claiming multiple goals and hoping to see what works, which discounts the (likely) possibility that the goals are mutually exclusive or that they require distinct and separate system design features.

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. However, we need to expand this research to be able to understand how these technological characteristics might align with either the external responsibilities of representative governments or the incentives of foundation philanthropy.

Notes

This article was derived from notes and executive summaries of a charrette hosted by the Digital Civil Society Lab, a research project of the Stanford University Center on Philanthropy and Civil Society.

Included below is some of the literature generated during this event:

Critical process and design features to be addressed in civic crowdfunding

• Where is public accountability built into the platform and the process?
• How, when, what, for what purposes and to whom are data generated by and about the process made public?
• How does deliberation happen as part of the platform/process?
• How is participation and access assured and measured?
• What recourse do members of the public have at each of the stages of the process?
• How are the algorithmic interventions and their effects made visible and held accountable? What about the platform vendors?
• Are there separate funding and decision-making methods for underserved communities? If so, how do these work?
• What keeps people from participating, time, money, and/or access? How are these barriers overcome?
• How will the process/system foster deliberation and association?

Accountability features for civic crowdfunding

Information disclosure from and about crowdfunding platforms was a topic of great concern. Most of the meeting participants believed that we need greater disclosure from and about crowdfunding platforms. With this in mind, we generated the following set of ideas about crowdfunding and data disclosure.

• Financial accountability to donors
• Visibility into process for setting projects, priorities
• Algorithmic
• Democratic process, crowd sourcing
• Paid promotions, SEO
• Platform fees to donors and to public
• Public visibility into platform data
• Cost of the money
• Location — zip
• Enterprise sponsors, disclosure
• Success, failure rates
• Donor identification (??)
• Demographic data, donors and beneficiaries
• # of Donors and some kind of measure of support intensity from local community
• What approach to donor anonymity — FEC, SEC, or IRS?
• Some form of public support test?
• Maximum percentage from single donors?
• Who is relevant public funding authority? MTA, parks, etc
• Conflict of interest, disclosure process
• Want to be able to calculate crowding out effects over time — how?
• What do we want to know, need to know about individual donor behaviors? Can we design fro aggregation, research, and anonymity?

Expanding civic participation

A group generated several ideas to help a city design a crowdfunding campaign specifically intended to expand civic participation among language-minority populations. These ideas included:

• Connect info on project to personal experience
• Broadband
• Potholes
• Contest — where your poop goes
• Kids rides in police cars and fire trucks
• Experiential — libraries with empty rooms and no books
• Simulation events
• Virtual tours
• School as safe space, manufactured experience and share projects
• How can cities make sewage sexy? Music videos. “Your #2 is my #1”
• Sewage plants tours
• Entry for biggest pothole
• Textable preferences
• 3D models of projects
• 2 champions per projects
• Coordinate with local sports venues
• Swag bags
• Free baby sitting
• Events before sporting events
• Celebrity
• Materials to take home
• Change meeting times
• Fire lounge, pancake breakfast equipment
• Test engagement process and iterate
• Hold events at nontraditional venues
• How can city help neighbors become advocates?

Additional Research Questions

In addition to the questions identified in the narrative above, the group generated many other possible areas of inquiry. These are presented below, clustered by whether they focus on civic or philanthropic actions.

For civic crowdfunding

• What are the governance options for these efforts?
• What are the effects on intended beneficiaries?
• How does the strength of community relate to project success?
• At what date in the future will crowdfunding not exclude certain populations?
• Can crowdfunding platforms be designed to counter inequity and ineffective choices?
• Does civic crowdfunding expand the available resources or does it involve the crowding out of other financial resources?
• How do tax incentives shape civic crowdfunding? Do they encourage people to take money out of the taxable pool?
• How does time factor into the use of crowdfunding as a civic financing strategy? When it is used to fill public budget gaps created by prior decision making?
• What do we know about the role of incentives for civic crowdfunding?
• Can crowdfunding platforms be designed to foster deliberation and association?
• What are the hard costs of raising money on crowdfunding platforms?
• What are the social costs/benefits of the money?
• Which features of crowdfunding platforms are actually democratic and how do you design for them?
• Does civic crowdfunding lead to an abdication of public responsibility?

For philanthropy

• Does crowdfunding increase the base of donors?
• How does crowdfunding fit into lifelong philanthropic behavior?
• How do different generations of donors understand and use crowdfunding platforms?
• What are typical donor acquisition costs?
• How does crowdfunding affect nonprofits capacity to fundraise? To market themselves? To cover overhead expenses?
• How do donors define and act on risk on crowdfunding platforms?
• What are the characteristics of organizations that have benefitted from crowdfunding?
• Can crowdfunding be used for long-term mission support or only project funding?
• Does crowdfunding act as a form of “mutual fund” creator for big projects?
• Does the type of project (infrastructure, services) matter to how civic crowdfunding works?
• Does civic crowdfunding crowd out activism or policy change?

General Research Questions

• Does crowdfunding democratize funding? If so, for whom — donors or beneficiaries? How?
• What does funding requirement do the nature of participation? How does crowdfunding participation differ from crowdsourcing?
• How do contributors identify on crowdfunding platforms — as donors, investors or citizens — and how do the platforms shape this identity?
• Are there instances when elite philanthropy would be more democratic than crowdfunding?
• How does crowdfunding affect relationships between donors and beneficiaries?
• What needs to be visible and transparent on and from these platforms?
• Algorithmically and procedurally
• Is crowdfunding best considered an asset class or an extension in self-determination? How does civic crowdfunding compare to peer-to-peer lending?
• Crowdfunding platforms do not abolish information asymmetries, they give them new form. What are the new asymmetries?