As an author I am no stranger to controversy. I don’t go out looking for trouble but I also try not to filter my inspiration either. In just the past two months I have written about Steve Harvey and the way he upset the tiny house community, the ways in which tiny house communities will not cure homelessness, and even how Donald Trump may be our nation’s best leader at this time. That said, it should come as no surprise that I am penning this article on the ill-effects on crowdfunding. Let me start by saying I am rarely a fan of it. I consider it on a number of levels and in a lot of instances to be personal fundraising for the tech-savvy at best and socialist panhandling at least.
Crowdfunding is one of the most overused terms in recent memory. It comes around like a bad penny. It isn’t just a term used for personal projects or unfunded ideas. It has even made its way into startup investing, not-for-profit operational expenses, and research models. Because there are a several kinds of crowdfunding in today’s market, the distinction between them isn’t always so clear. Historically it has been around for generations in the form of telethons and boosters. Take NPR for example.
Twice a year – without fail – your local NPR station will hold a campaign drive in which they will play snippets of “example programming” that is cleverly sandwiched between please for financial assistance as “operators are standing by.” The host typically talks about the kind of programming available because of donations like yours and then transitions into the budgetary needs of the station. The caveat is that the station only requests from those who openly support the programming of the station and can’t imagine life without it. They target their current subscribers and market segment. No harm. No foul.
On April 5, 2012, President Obama signed into law The Jumpstart Our Business Startups Act or JOBS Act, as a law intended to encourage funding of United States small businesses by easing various securities regulations. It was aimed at creating new ways for investors to fund startup businesses. Some may argue though that it opened Pandora’s box for platforms like GoFundMe and Kickstarter which now act as the Silicon Valley of the early millenium (as well as a soapbox for those who feel they have a “cause.”)
Let’s take a look at what can most clearly be defined as three categories of crowdfunding:
Reward/Donation – In return for a donation (usually set in tidy increments) from fans of a project or product, a business or non-profit offers an incentive. These incentives can range from a “digital shout out” to having your name appear in credits of a movie to an actual finished product of what you are supporting. This $10+ billion worldwide segment is led by Kickstarter and Indiegogo and allows pretty much anyone on board who may be looking for funding from anyone else.
Lending – This segment includes platforms like LendingClub, which helps connect borrowers with lenders over the Internet for personal or business loans. It avoids traditional banking methods and can often come with high risks or high interest rates.
Equity crowfunding – This is a complex segment and really breaks down into two pieces.
- Accredited – This group includes AngelList, FundersClub, etc. These are membership organization and are only open to accredited investors and oftentimes have sophisticated terms and policies.
- Equity – The JOBS Act calls for this kind of crowdfunding because it allows anyone to invest in a startup while gaining the potential of equity in the company.
It’s safe to say that the crowfunding I am most talking about and the segment we are most familiar with is the reward/donation kind. It allows you to finance innovation directly or at the product level. Contributors pre-purchase items (as is the case with something like the Smart Parka) products or simply donate to bringing it to market. As you would imagine equity crowdfunding investors (like the style of the popular show Shark Tank) take ownership in the company in exchange for investment dollars. But what happens when the reward part of the equation is removed? What happens when a request is made by an individual and not a fledgling business? Is it then still reputable or is it little more than modern day panhandling? Crowdfunding in its latest iteration has sadly become the new way to seemingly finance your personal life.
Let it be known. I am not judging in these allegations. I am not saying that someones student loan debt is any more important or any less important than someones desire for IVF treatment so they can start a family. I am also not saying that a film project is a more worthy cause than building a tiny house for yourself. What I am saying though is that those sort of personal requests have the ability to desensitize the generous public in a very new way. I remember reading an article once that interviewed a young couple that turned to crowdfunding to pay for some medical needs. Their “campaign” was funded and they received an unusual amount of money. The husband was quoted as saying something like if it wasn’t for crowdfunding, we’d probably have to take out a loan or beg family members. Where is the accountability in that though? Where is the accountability in asking each person that sees your “campaign” to donate just one dollar towards something that is deeply personal. Why not involved your family and close friends? Why not take out a loan? Are those deplorable options? Are they not the tenants of which our society was founded? I think the industry on the whole is one that is guided by raw emotion.
Giving a buck makes you feel good. Giving $5 makes you feel even better. And giving anything under the premise of helping out another? Priceless! But let’s be honest. It is a slick marketing technique. It is the same concept as NPR started years ago. Ask complete strangers to give money at the risk of a penalty; severe or not. If a couple is trying to adopt a child but they don’t reach their campaign goal, the child does not get adopted and runs the risk of (fill in the blank). Pander to emotion of the public who is looking for any way to feel better about themselves or the world around them. Why in today’s global marketplace should anyone have to work hard, save their money, and postpone a project until said funds are raised? That is archaic. Why not just extend the arm, raise the palm to the sky, and ask “brother won’t you spare a dime?”
What do you think about crowdfunding? Should it be reserved for businesses and commerce or does it have a place in the Average Joe lifestyle?
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