The Competition From Crowdfunding Sites

Imagine with me that you are listening to the radio, and they mentioned a horrific famine affecting four countries in Africa. This should not be too hard to imagine — in 2018, famines in Nigeria, Somalia, South Sudan and Yemen have been called the greatest humanitarian crisis since World War II.

You want to do something about this. Back when you used to travel for business, you went to Nigeria a few times. You have colleagues there and have an affinity for the country.

So you want to help out. Not necessarily to end all famine — you know better than to try to boil the ocean with a $50 gift — but to help the people of Nigeria somehow.

You search online and see two options. One is an international nonprofit that you know and respect. They have several pages and copious information on their site about the famine in Nigeria and what they are doing to alleviate the plight of Nigerians. You click donate, but the donate page says nothing about Nigeria or the famine. You fear your donation will go into an undifferentiated pot of money.

So you try the other site. You can see the name of the person to whom you are donating, where in Nigeria they live and what they want to use the money for — some force-multiplying activity that you think will help them and those around them. Even better, the donation is a loan, so when the small business you are funding makes back its money, so do you. You can then reinvest that money in another enterprise, and another, and another. You pick a picture and a story and donate.

It’s time to view these and efforts like them as serious disruptors to the nonprofit status quo. Donors are looking to fund an impact and a cause, not necessarily an organization. Why should they pay what they perceive to be (but aren’t) high overhead rates when they can do a micro-loan with Kiva, or directly fund a school through DonorsChoose, or find a person in need through GoFundMe?

High-Engagement Donations

These organizations are growing in impact. From 2011 to 2018, Kiva went from $89 million deployed in loans to $158 million. They went from 458,000 lenders to 640,000 in that same time period. DonorsChoose went from 471,000 donors in the 2015 to 2016 school year to 767,000 donors in 2017 to 2018 school year.  Remember, this is, at the same time as the broader sector, was (and is) bleeding donors.

Established nonprofit brands are engaging this fight based largely on the trust they have justifiably built over generations. Like IBM in the early computer market, this works for a time. People used to say, “No one ever got fired for buying IBM,” for a reason.  No one still says this about personal computers. It was true until it wasn’t.

This trust is fragile because it is predicated on low-engagement donations. If our example person listening to the radio about the famine in Africa had just a generic sense of wanting to do good and no tie to Nigeria, the first donation page of the respected international nonprofit works well enough. But the donor who wants to do something specific — to dig a bit deeper — finds the connection with this trusted organization lacking.

It is certainly true that most donations are low-engagement donations where the donor will not comparison shop.  Perhaps a nonprofit could rely on trust as their differentiator and still maintain for the long term. This leaves aside important implications of losing high-engagement donations:

• High engagement donors tend to be larger donors. They tend to be the donors that retain over the long-term. They tend to be the ones who evolve towards higher value types of giving, like monthly, major and bequest giving. Since only 4% of donors give 76% of donations and the top third of donors giving 96% of revenues, according to the Fundraising Effectiveness Project, discerning donors are exactly the donors you would want, were you choosing.  Remember, you don’t want to be loved — you want to be preferred.
• The donors to crowdfunding sites also tend to be younger than the average nonprofit’s donors. This means they neither have the same legacy trust of longer-standing nonprofits nor (more importantly) will they develop it in the long-term without a change.
• Markets generally tend toward what higher involvement individuals are doing.  When airbags first came out, they were only on luxury vehicles; now carmakers compete to see how many they can cram in. I worked in the produce department of a grocery store in 1996 when the store got its first organic section. It sounded a bit "granola hippie" to me, which is why I didn’t see the organic food movement coming. This lack of foresight is one of the many reasons I do not own my own island. What was a luxury becomes commonplace.
• How many donors can you afford to lose?  When Hurricane Harvey hit, the American Red Cross used its 136-year-old brand to raise and deploy $312 million in the first three months. GoFundMe used its seven-year-old brand to raise and deploy $27 million in the first 30 days. Some of GoFundMe’s donations probably made the pie bigger — donations that would not have been made without directed philanthropy. But some of this came from donations that would have originally gone to the Red Cross.

The other challenge of relying on the “trust us; we know what we are doing” model is it’s a bit like being the best gunfighter in the West: you must win definitively every time.  Your competitors only need to win once to crack the façade.

Crowdfunding: The Disruptor

The customized one-on-one experiences of giving to a specific person (and low overhead rates — more than the failure of those as a yardstick later) are often used as a proxy for effectiveness. This is unfortunate because, while crowdfunding sites can be very effective distributors of philanthropy, they are not (currently) engines for systemic change. A crowdfunding site can raise funds for a needed surgery; it does not address why the surgery was so expensive or why insurance did not cover it. It can help get new textbooks for an underprivileged classroom; it can’t address fundamental funding disparities between the richest and poorest school districts. It can help raise money for a victim/survivor of a drunk driving crash; it can’t prevent drunk driving.

Philanthropy should help individuals, but organizations should also strive to fix problems upstream. Or, as Dr. Martin Luther King, Jr., put it, "Philanthropy is commendable, but it must not cause the philanthropists to overlook the circumstances of economic injustice that make philanthropy necessary.”

Consider a site like GoFundMe, which is often used to pay for U.S. health care costs — costs that are higher than in other countries and often externally funded in those same countries. You pay for a surgery without making future surgeries more likely.

Crowdfunding can also sometimes reinforce structural iniquities. Researchers looked at direct philanthropy on Kiva, asking assistants to rate photos of people requesting micro-loans by, among other things, attractiveness, physique and skin color. The study found that, all other measured things being equal, those people who were one standard deviation:

• More attractive had an 11% shorter time to get full funding.
• Heavier had a 12% longer time to get full funding.
• Darker in skin color had an 8% longer time to get full funding.

For perspective, asking for 10% more money increased the amount of time to complete the loan by 13%. So, being more attractive and skinnier than the average was the equivalent of getting almost 20% more money.

This isn’t unique to crowdfunding. Nonblack hosts on Airbnb get 12% more (right in the same ballpark as the Kiva premium on whiteness) than black hosts for similar rentals. Nor is this a problem with Kiva. I can’t reasonably blame the crowdfunding sites for this any more than I reasonably can blame my mirror for what it shows me in the morning. (Not that I don’t try.)

The challenge is humans are more inclined to whom they are socially close. That, unfortunately, means supporting “us” more than “them.” This is replicated on sites like Kiva, where people are more likely to give closer to home. On Kiva, because most supporters are from North America, a philanthropic venture in Asia has a 95% lower chance of being funded than a North American one.

None of this means you shouldn’t give through these sites. Helping one community, school, or person at a time is noble in and of itself, especially when it helps solve larger issues like who has access to the multiplicative powers of finance, like Kiva, or allows teachers to break out a top-down dictation of the resources others think they need, like DonorsChoose.

But philanthropy should also fund a traditional nonprofit’s roles of pushing for systemic solutions and focusing its solutions based on need. It shows the limits of donorcentricity, with a desire to drive our nonprofits with our donors, not giving them the keys.

Unfortunately, these are usually tough sells. For years, we have talked about the systemic problems through the story of the one. It’s the one that touches the heart. Emotion is far better than education in low-dollar appeals (and since you attract people as low-dollar donors, that hurts acquisition as well). If someone can see a person’s plight and fix it instead of chipping away at an underlying problem, easy usually trumps thorough.

The advantages of trust and systemic, studied solutions are not going to be enough. Thus, these crowdfunding competitors look like classic disruptors, forcing traditional nonprofits to adapt or die. This can be a good thing — a purging fire that clears out the inefficient and ineffective. It does, however, mean that the efficient and effective need new factors on which to compete — showing donors that you are 1) using their gift wisely 2) for the ends they desire and 3) where they desire.

Editor's Note: This was an excerpt from Nick Ellinger's newly released book, "The New Nonprofit: Six Models to Raise More Money and Accomplish More Mission." You can learn more here.