What's next for crowdfunding?

Crowdfunding: a new way to finance social impact

“When I first started I had some prototypes, a website, and a $1,200 artist’s grant. I knew that if this was going to work I was going to have to find a customer in the first six months.”

In a world where $539 billion of dollars of corporate training have little impact, Ilana Ben-Ari spotted an opportunity to found Twenty-One Toys, a social enterprise that makes toys for innovative skills training. Ben-Ari knew that play-based learning could be more effective than traditional corporate workshops. So she created toys that could teach empathy to anyone–whether a child or a CEO. 

After her first year of business, Ben-Ari turned to crowdfunding and raised $50,000 from Kickstarter, which allowed her company to sell toys in 30 countries and made it possible to get attention from the press. Time Magazine called the company’s toys “one of six new technologies shaping classrooms of the future.”

Canada’s crowdfunding market is growing. According to the Crowdfunding and Fintech Association in Canada, “crowdfunding volumes in Canada grew 48 percent from 2013 to 2015 and reached $133 million in 2015.” Compared to traditional charitable giving, which globally grew by only about 4 percent last year, crowdfunding grew approximately 35 percent. 

In 2019, more than 3,000 crowdfunding campaigns were launched in Canada. While this is a tiny piece of a global market of nearly nine million campaigns worth seven billion dollars, it still represents a significant new form of financing in Canada.

According to Ben-Ari, “Crowdfunding allowed us to go directly to our customers to validate our product and fund our production. We also avoided the hassle of VCs. I’ve seen the stats; women receive only 4 percent of venture capital in Canada. So I went my own way and doubled down on crowdfunding.” 

Eventually, Ben-Ari’s second product, the Failure Toy, raised a further $100,000 on Kickstarter.

Another type of crowdfunding helped Ben-Ari along the way. SheEO blends elements of traditional venture capital financing and crowdfunding and has loaned more than $4 million to women-led ventures at 0% interest.

SheEO CEO Vicki Saunders says that “true innovation is about investing in projects that will solve the world’s ‘to do list.’ So we source capital from thousands of women, and then invest in hundreds of women-led projects.” 

Alinker, another SheEO-funded venture, even launched a user crowdfunding platform, allowing their users to start their own crowdfunding campaigns.

Types of crowdfunding

Platforms like Kickstarter allow entrepreneurs to get direct validation from potential buyers. As two examples, the Pebble wristwatch and the Myo armband raised millions of dollars and received hundreds of thousands of pre-orders through crowdfunding. 

Such high-profile cases are examples of reward-based crowdfunding, where funders receive merchandise in return. But reward-based crowdfunding is only one of several types.

There are four main different types of crowdfunding in Canada:

• Donation-based crowdfunding, e.g. Kickstarter, including:
  • Traditional donation-based, where funders do not receive a reward 
  • Reward-based, to get products or perks
• Subscription-based crowdfunding, e.g. Patreon‘s funding of artists/creators
• Equity crowdfunding, e.g. Wefunder with startups 
• Lending-based crowdfunding, e.g. SheEO, including:
  • Traditional lending, with standard terms. 
  • Forgivable loans, which reimburse from revenue or profit
  • Pre-sales, where a lender receives a product

What’s fascinating is that new interesting techniques of crowdfunding are also appearing, including types that utilize blockchain and smart contracts. 

Crowdfunding for impact

Many of today’s most innovative social enterprises and non-profits are exploring how crowdfunding can drive lasting impact.

In New York, Junto, a non-profit organization that seeks to create accountable, humane, and transparent social media, raised over $100,000. According to Eric Yang, the founder and executive director, Junto chose crowdfunding because they wanted “to raise funding without the need for investors, while simultaneously expanding their community base.”

Yang says that people “participate in funding projects that they are interested in supporting” and that crowdfunding platforms “provide you with robust analytics to see where your supporters are coming from and whether they have contributed to other projects or not.” 

In this way, crowdfunding provides non-profits with valuable audience research that can be used to grow communities.

Most provocatively, Yang says that it’s better not to involve traditional VCs, as “decisions made to prioritize financial gain [are] often at odds with what is best for the end user. That is evident from the enormous privacy concerns, mental health issues, and addiction produced by the extractive revenue models of existing social media platforms today.”

But crowdfunding may not be right for everyone. Yang suggests that organizations considering crowdfunding should ask themselves:

• Can your organization offer something tangible to encourage people to contribute to its crowdfunding campaign? 
• Do you have a big enough community or strong enough marketing strategy to gain traction? 
• Are you able to raise enough money to cover the crowdfunding fee and rewards expenses while still leaving enough for your organization? 

And very plainly, Ben-Ari also agrees that it’s not all smooth sailing: “Crowdfunding does not make a business. It’s a tool to get you to the next phase of your project. If you do it right, you’ll not only get pre-orders but also you’ll get a community and a ton of helpful feedback. [But] don’t do it if you think it will be an “easy way to get money.”

“Ultimately, each organization will have to evaluate its strengths, values, and needs to decide whether crowdfunding is the best way to go,” says Yang.

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