6/30/15

Philanthropy is not only to do better, but to do differently

Jack Ma, in an interview with Charlie Rose, delivered an insightful perspective on philanthropy. In response to a question regarding his thoughts on the Giving Pledge and philanthropy in China, he responded (start watching around 16:10):

"...I never thought that the money I have belongs to me. It belongs to society. When you have a couple of million, you’re a rich guy. When you have 10-20 million, that’s capital. When you have over 100 million, that’s the social resources. Society gave it to you [...] it’s not my money..."
It’s that last sentence that I think is the most interesting, and worth abstracting.

Consider the US scenario. Philanthropy is given special treatment by the IRS. Mainly, contributions to charities and foundations are tax-exempt under Section 501(c)(3) of the tax code. Framing the notion of tax exemption another way, philanthropy can be seen as an "opportunity cost" to government spending on social resources. This means that the US government, and by extension US citizens, are trusting non-profit organizations with these resources to do better, and/or do differently than the government.

To do better, means to deliver more of a desired social outcome using the same resources. This concept has been around for a while, and has been widely debated. I’m not here to revisit that debate. I accept the premise that non-profits can do better than government in certain areas, and vice-versa. However, I do think there's room for improvement when it comes to having a robust evidence-base to show the differential between government and philanthropic-led social interventions/services.

To do differently, is where I think there's more headroom for growth and innovation. The biggest comparative advantage that philanthropic capital has over government capital is the loosening of constraints on dimensions like: return timeframes, deployment time, and politics—among other things. 

Philanthropic foundations answer to their own Board of Directors, their program staff, and to their stakeholders who don’t usually think along election cycle timelines.

The implication is that philanthropic capital boasts one of the most exciting features that very few other capital sources have—a potential for very high risk-tolerance. Its deployment can have a similar dynamic that venture capital has in the investment ecosystem. I think more non-profits and foundations need to recognize this and more critically evaluate their appetite for risk. This should start from the bottom (from how funding is deployed via grants), through to high-level strategy, culture, and spend-down timeframes.

To bring it full circle, philanthropy is one of the biggest tools we have in our toolbox for increasing system-wide social impact. It only logically exists if its: 1) helping to do better (e.g. increasing efficiency) and/or 2) helping to do differently (e.g. raising the bar and/or changing the paradigm). A risk-seeking culture has to be at the center of philanthropy that complements other "social resources". As with any basic principle of risk—only through taking big enough risks, will we ever have the opportunity at the bigger rewards.

6/29/15

What I learned from crowdfunding 74 projects

Up until recently, I didn’t give much thought to philanthropy. I found the whole process of selecting the “right” non-profit organizations to be unexpectedly complex. Like many of my 20-something year old (millennial) counterparts, my day-to-day experiences with philanthropy mostly defaulted to the occasional donations made through fundraisers hosted by friends or at work.

It wasn’t until I tried crowdfunding this past year that I found a more intuitive mechanism for making philanthropic contributions. Crowdfunding abstracted away some of the complexity associated with charity and provided a more systematic way to segment, target, and track my impact [1].

A recap of crowdfunding
Crowdfunding is one of those concepts that sounds simple, but in reality is deceptively complex. By definition, crowdfunding is “the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet”.

In the non-profit context, the term crowdfunding has been used interchangeably with digital fundraising, and is often viewed as a “channel” for engaging millennials. While crowdfunding certainly fits the definition of a channel — with unique user behaviors — thinking of it as such, only scratches at the surface.

Building a philanthropic “stock” portfolio
Most crowdfunding platforms allow donors to fund small-portions of discrete projects — effectively building a portfolio of philanthropic grants. Using an investment analogy, this is similar to buying and creating a portfolio of stocks.

While donations to multiple non-profit organizations can also simulate the experience of having a philanthropic portfolio, a project-based portfolio is conceptually more intuitive to segment, and track over time.


For example, last year I put ~$3.7k into 74 projects, which was levered up to ~$356k by others in the crowd. I clearly see my contribution relative to the total (~1%), and can track this portfolio of projects over time. Once each project completes its stated activities, I will also get a sense of the outcomes, impact, and next steps.

Like stock portfolios, I can also do things like slice and dice my philanthropic portfolio to see how concentrated/diversified I am, and adjust accordingly based on my preferences.


High resolution philanthropy
Most crowdfunding platforms operate on a project-based financing model. This allows for donors to allocate their donations down to the activity-level (vs the organization-level). This higher resolution philanthropy lets donors start with the question: “what specific things am I interested in supporting?”, rather than “what non-profits organizations do I want to support?”.


For example: consider if you wanted to help find a cure for ALS by supporting ALS research. Traditionally, the way you could do this was to support charities like ALSA — the charity that ran the Ice Bucket Challenge. However, ALSA does not exclusively focus on funding research (see pie chart). InFY2014, roughly $0.28 of every dollar went to research expenses[2].

With crowdfunding, donors have the choice (but not the obligation) to get more specific. Sticking with the ALS example, donors could instead donate their dollars on a crowdfunding platform to an ALS research project[3].

This was my personal preference. I used crowdfunding to get the specificity that I wanted — with roughly $0.80-$0.90 per dollar donated going directly to the researchers for research-related activities [4].

Marginal impact on donated dollars
One of the most difficult questions to answer in philanthropy is how to maximize the marginal impact of one’s dollars.

I won’t get into more philosophical debates like whether “funding the arts is better than funding poverty interventions”, but rather, more broadly discuss the new information that crowdfunding provides to donors to complement their decision-making.

Most crowdfunding platforms require that any campaign/project make public their total budget and budget-breakdown. The platform will also display how far (or close) a project is from its budget goal. It changes the fundraising attitude from, “we’ll raise as much as we can” to “we’ll raise as much as we think we need”. It may seem trivial, but disclosing these pieces of information is critical.


With this, donors can think about marginal impact along the dimension of need. All things equal, I felt more comfortable with making choices about where my next dollar would go. For example, I preferred funding projects farther from their goal, rather than those already past its goal.

This type of information also has implications for reducing concentrations of donations (a limited resource) to a small number of charitable organizations/causes — potentially helping to maximize marginal impacts across the philanthropic ecosystem.

In Conclusion
Defining crowdfunding merely as a “channel” for engaging donors to support “business as usual” philanthropy leaves a lot of opportunity on the table. Crowdfunding provides donors the infrastructure to experiment with high resolution philanthropy, a portfolio approach to making donations, and new decision tools to evaluate marginal impact.

Ultimately, this post is about highlighting — from a millennial donor’s perspective — observations from a year spent crowdfunding. It’s not to suggest that crowdfunding will replace traditional philanthropy. But rather, to encourage discussion and debate on points that I think should be getting more attention in the broader conversation when it comes to millennials and philanthropy.


Notes:
[1] I focus here on my own observations — recognizing that while I classify as a millennial, I don’t speak for all millennials, nor do my views only apply to millennials. Any data I reference from my own crowdfunding experiences, are compiled from publicly available data from my crowdfunding profile: here.

[2] Looking at ALSA’s 3 years of financial statements, the “Research” expense line-item has been roughly consistent (though this may change in FY2015 after the Ice Bucket Challenge).

[3] This is not to say that non-research activities (like patient & community services, public & professional education, and fundraising), are not important. Rather, that everyone has their own preferences — which could be very specific, or broad-based. There are people who don’t want the specificity and trust charities to allocate the funds accordingly.

[4] Most crowdfunding platforms charge a $0.05 platform fee, $0.03 payment processing fee per dollar donated. There sometimes is an additional gift processing fee from the receiving organization that amounts to ~$0.02-$0.10 per dollar donated.

Thanks to Lorena and Brian for reading drafts of this.

6/8/15

When crowdfunding becomes a commodity


In recent years, the technology stack powering crowdfunding platforms (for rewards- and donations- based crowdfunding) has been nearing commodity status.

This has been driven primarily by developments in the payment layer — where companies likeStripe, Braintree, and WePay have converged on world-class payments-as-a-service (PaaS) solutions for crowdfunding / marketplace platforms.

As crowdfunding platforms become increasingly undifferentiated based on their technology, operators face a critical decision:

1) Double-down on their technology to become the tool for general fundraising activities; generating growth through increasing transaction volume.

2) Focus on funding discrete projects in a specific vertical; generating growth by expanding the Community and integrating vertically.

Both present different business models and serve different market needs.

1. Building the technology for fundraising: Crowdfunding-as-a-Service
Platforms that place their bets on technology are effectively commoditizing the remaining feature layer of the crowdfunding tech stack. They are competing to become the premier “crowdfunding-as-a-service” (CaaS) player.

Under this approach, the traditional crowdfunding fee-for-service business model remains the dominant revenue driver — where, in exchange for a small platform fee (typically 5–7% per $ raised), the platform offers standardized tools to run a fundraiser.

Due to low switching costs and thin profit margins, the platforms that survive and “win”, are the ones that command significant transaction volumes, offer the best price points, and are first to realize economies of scale [1].

Companies that most resemble CaaS platforms today are the “anything goes” platforms like Crowdrise, FundRazr, GoFundMe, Indiegogo, and Tilt.

In the long-run, we should expect this grouping of platforms to consolidate — limiting the feasibility for new entrants. Platforms heading down this path will need to generate growth by aggressively increasing transaction volumes. The implications for this are as follows:

Shifting towards cause-based fundraising — e.g. for non-profits,individuals, etc
Cause-based fundraising is attractive for CaaS platforms for two reasons:
  • Cause-based fundraisers are typically run by organizations or individuals with established donor networks and/or brand. There is less of an expectation for there to be an existing Community on the crowdfunding platform to fund campaigns . In fact, it’s often understood that these crowdfunding platform serve as a technology enabler for existing fundraising initiatives.
  • Cause-based fundraising campaigns tend to not be as rigidly project-based, and therefore, are usually structured as keep-it-all (KIA) crowdfunding campaigns. KIA refers to funding where donations are collected and processed regardless of if a campaign hits it’s specified target. As a result, KIA crowdfunding guarantees healthy transaction volume on which platforms can charge their fees — a feature critical for the economics of volume-driven businesses [2].


Lowering fees in exchange for scale
One of the levers that crowdfunding platforms can control is their platform fee.

Well-capitalized (or already profitable) crowdfunding platforms will need to experiment with lowering their platform fees as a way of driving more transaction volume.

Platforms like Indiegogo are already experimenting with varying (lower) fee structures. Non-profits get a 25% discount, while, Indiegogo Life (the new personal fundraising extension of Indiegogo) offers a 0% fee for all personal fundraisers.

This gamble can be worth taking as larger transaction volumes unlock benefits resulting from economies of scale. One example is with payment processing fees — where processors offer lower credit card fees per transaction as larger volumes are processed. These savings can be passed onto users (to further boost volumes) or be kept entirely (to boost margins).

Racing to internationalize the business
Being first to a new geography creates a number of non-technical competitive advantages for CaaS players in terms of capturing volume . This includes raising brand recognition ahead of competitors, and establishing strategic partnerships.

Fortunately (or unfortunately), crowdfunding payment processors like the ones mentioned above, have significantly simplified the technical requirements for going international.

As a result, many crowdfunding platforms are now on equal footing when it comes to international expansion. This makes quick international expansion an imperative. For example, at the time of writing, any crowdfunding platform using Stripe Payments will immediately have access to payment infrastructure that can accept and settle payments for 20+ major countries around the world.

2. Picking a niche, and growing beyond crowdfunding
Platforms not undertaking a CaaS strategy will need to create competitive advantages that don’t rely solely on price and transaction volume.

A platform’s competitive advantage will need to come from:
  • Developing an expertise in a specific vertical (and the strategic / operational challenges that come with it),
  • Cultivating an engaged and relevant Community that interacts with the platform frequently, and
  • Expanding into other value-added services within the specific vertical — diversifying from crowdfunding.
Companies best positioned for this approach are the ones that started out serving a specific vertical, fund rigid projects (not open-ended causes), and have a company culture that puts their Community at the core of their business.

Kickstarter is the most notable example. They serve the creative projectvertical to enable the creation of consumer tech, games, and film (among other things). There are also others popping up for verticals like science,healthcare, etc.

In the long-run, we should expect an expansion in the number of vertical-focused platforms. The template for how these platforms grow and scale will be subject to vertical-specific dynamics.

That said, there are general implications we can draw:

Broadening the definition of Community
Most vertical-focused crowdfunding platforms have Community management teams. These teams are responsible for (among other things) engaging with funders and project owners to get feedback for improving the platform, setting the culture, and advancing the collective Community’s broader mission.

While funders and project owners are important users, there are others that could benefit from / add value to the platform’s Community.
  • A starting point will be for platforms to experiment with the role of vertical-specific influencers, organizations, subject-matter experts, enthusiasts, journalists, bloggers, etc. In aggregate, the integration of these “non-funders” into the Community serves to:
  • Broaden the mandate and value of the Community beyond funding,
  • Strengthen network effects,
  • Improve distribution for fundraising projects, and
  • Democratize participation beyond only those with the financial means.

Developing a content strategy
Crowdfunding campaigns funding discrete projects are often the first step towards telling a much bigger story.

Most crowdfunding projects today are hosted on static landing pages that collect donations and provide some contextual content (e.g. text, video, images, comments, updates). Going forward, there are opportunities to use this content in a more deliberate and structured manner to tell a story.

Some early examples include:
  • Kickstarter’s timeline: Where all project pages have been changed to visual timelines (ex here) — reinforcing the fact that each campaign is a story that doesn’t end only with funding, nor does it have to only be about funding.
  • Experiment’s lab note update feature: Where updates are a channel forpublishing real-time science content not found elsewhere on the internet.
As the quality of the content improves and use-cases are better defined, content will become an increasingly important channel for re-engaging users to the platform.

At scale, content can also be filtered, sorted, and aggregated in more meaningful ways — opening the opportunity for crowdfunding platforms to evolve into themed content platforms.

Focusing on “fulfillment” activities
Project-based crowdfunding usually involves some fulfillment activity — e.g. funds raised to build a product, produce a film, conduct a research study, etc. A next step for many platforms is to offer fulfillment services to project owners.

For example, platforms like Kickstarter could provide services that help with the prototyping and manufacturing for product-themed crowdfunding campaigns. They could offer these services in-house (for a fee), and/or through partnerships with a trusted network of providers (for a referral fee).

This not only opens up other (higher margin) revenue streams, but can be beneficial for project owners as platforms have the buying power to negotiate for bulk discounts on the most frequently used services.

In conclusion
As commoditization comes into full swing, platforms will either aspire to be the largest Crowdfunding-as-a-Service player for generalized fundraising, or become a niche player that looks vertically in the value chain for growth opportunities.

The first wave of disruptions brought on by crowdfunding challenged conventions around how the world could fund things via the internet. This next wave will not only reinforce the role of technology in fundraising at a global scale, but will challenge us to see that funding is only one of many activities that “crowdfunding” platforms can offer.


Notes:
[1] A CaaS competitive landscape is similar to the payment processing landscape where margins are very thin and switching costs are relatively low. For example,Balanced Payments, a payment processor with close to half-a-billion in annual transaction volume had to closed their doors earlier this year, amid competitive pressures from other players.

[2] By contrast to KIA crowdfunding, all-or-nothing (AON) crowdfunding has funding risk involved. AON crowdfunding is where pledges only materialize into a donation if the project hits its stated target. AON crowdfunding applied to a low margin, high volume business can introduce material stresses / unpredictability to the platform economics.

Thanks to Phil for reading versions of this.