Culturally, people aren’t comfortable asking for money, even when they really need it, but when there’s an intermediary, or the person receiving funds can offer something in return like a hand-written note or a thank you video, it kind of relieves the cultural pressure of asking for money. —Lee Andrews, a crowdfunding consultant and vice president of business development at When You Wish.
Dawn Ferris, a 29-year-old fashion designer in New York, couldn’t be where she is today without her dad, and now she wants to give him something in return. So she is turning to crowdfunding site youvegotfunds.com to help pay back her father, a truck driver who took out $60,000 dollars in loans so she could attend the Pratt Institute and pursue her dream of being a designer.
“My dad is getting a lot older — almost 60 now — and still working 15-hour days. He has all this money he still owes and should only really be working for the next few years,” she said. “I wanted to do this campaign to take the burden off of him. He’s always put me first before everything, so I wanted to give back to him.”
Ferris is among many worldwide turning to family, friends and strangers on the Internet to help raise cash for a personal financial need. Websites devoted to "crowdfunding" — which allows users to start a campaign to raise small to large amounts of money through a group of contributors — are popping up in increasing numbers. Over the past few years, in the depths of economic recession, crowdfunding has gone from a $32 million market to a $123 million market between 2010 and 2012, according to a research report from The Daily Crowdsource, an industry publication.
And while companies and nonprofits have turned to sites like Kickstarter and Indiegogo to fund startups and projects when traditional sources of funding fail, individuals are also turning to crowdfunding to finance everything from college education to infertility treatments to honeymoons.
“The growth we’ve seen lately has been with personal crowdfunding projects,” said Ellen Sperling, co-founder at youvegotfunds.com, the site Ferris is using to raise money for her dad. “More people are doing it. For the average person, expenses have become so high that people are more open to trying different alternatives to connect with people who can help.”
Not just asking for cash
When Ferris decided to start a crowdfunding campaign, she was a little hesitant about just asking people for cash on the Internet. “You know, there’s a little pride involved,” she said. “You don’t want to go out asking for money. But you see other people doing it and I figured it can’t be so bad. I think it’s definitely starting to be a bit of a norm right now.”
Despite the potential stigma attached with asking for money, crowdfunding has experienced incredibly high levels of growth. According a report from Massolution, a crowdfunding advisory firm, global crowdfunding volumes increased by 81 percent between 2011 and 2012, and $5.1 billion will be raised through crowdfunding platforms in 2013, compared with $2.7 billion in 2012 and $1.5 billion in 2011.
The setup of crowdfunding is meant to diffuse the pain of asking others for money, according to experts in the industry. By starting a “campaign” instead of going directly to a friend or relative for cash, there is an intermediary between the giver and the recipient of the money, said Lee Andrews, a crowdfunding consultant and vice president of business development at crowdfunding site, When You Wish.
“Culturally, people aren’t comfortable asking for money, even when they really need it, but when there’s an intermediary, or the person receiving funds can offer something in return like a hand-written note or a thank you video, it kind of relieves the cultural pressure of asking for money,” Andrews said.
Marcos Cordero, the founder of GradSave — which allows friends and family to contribute to a child’s college savings — said the number one hesitation from people considering crowdfunding is asking for money. But the combination of having his site act as a go-between and people’s desire to give something of value means contributors feel less like they are being asked for a handout and more like they are helping build a child's future.
“We’re finding people contributing saying, ‘Hey, I love this,’” Cordero said. “If an uncle was going to buy his niece a $25 toy, he'll now give 40 or 50 bucks to a college education fund because he knows it’s not something that's just going to get tossed to the side. It’s meaningful.”
The growth crowdfunding has seen during the recession seems counterintuitive when so many industries are taking a hit. But it may be no coincidence that crowdfunding has become more popular during an economic downtime, according to those in the industry.
“The recession has definitely played a role in how crowdfunding has taken off,” Sperling said. “People have been hit so hard — it’s commonplace now to be in financial difficulty. And that hardship has also increased people’s emotional desire to give.”
Coupled with tough economic times has been a tightening in traditional financing, leading people to look for alternative ways of getting needed cash. A recent survey from the Federal Reserve showed that the net percentage of financial institutions reporting increased willingness to make installment loans, which include credit cards, has averaged 15.4 percent, down from 18.9 percent last year and almost 25.4 percent in 2011. When people can’t turn to banks and traditional sources, they look to crowdfunding, said David Sperling, who co-founded youvegotfunds.com.
In addition to the recession, the cost of items like a college education or medical procedure has also increased, even as earnings decrease. Cordero says the growing cost of college is a major factor in parents signing up their young kids for a GradSave account.
“The disparity between earnings and cost of college is going to get so out of whack, it’s going to take different ways of saving than ever before,” Cordero said. “You know the saying, it takes a village to raise a child? Well now it takes a village from a financial perspective as well. And that’s not going away anytime soon.”
In many ways, crowdfunding isn’t new, say the experts. For example, grandparents have always wanted to contribute to their grandkids’ education, Cordero said. The difference now is that people can ask for money through a much larger platform, thanks to social media networks like Evites, Twitter and Facebook.
But unlike asking your family and friends for money in the past, often the success of a crowdfunding campaign depends on how you present your situation online. Many sites have consultants that help you create a successful “narrative” that will attract people to give to a particular campaign.
“The success of a campaign depends on two things: the promotion of the campaign and how you phrase it,” Andrews said. “I’ve seen people raise more money for a trip to Cabo than a dog dying of cancer. If you don’t phrase it well, people won’t donate.”
Andrews added that there is almost a mathematical formula to predict the success of a crowdfunding venture. “You want to have the first 5 percent of funding lined up before you launch a campaign,” he said. “Then your personal or inner circle needs to donate — when you get to 30 percent, that’s when you start seeing strangers donate.”
Dave Sperling said that crowdfunding is not a simple way to get cash — if the person isn’t willing to put in the work to create a compelling story and promote it, they’re not going to raise any money. But if a person can show contributors how the money will help them accomplish a goal or change their financial habits, they’re is much more likely to succeed in raising money.
“When you have a compelling story and provide updates about your progress, the crowd becomes part of it,” he said. “It becomes more than ‘pay my bills,’ but instead becomes ‘help me become an engineer.’ Then, when the goal is accomplished, the contributor really feels like ‘I helped build that.’ ”