More On Tax Planningfrom The Advisor's Professional Library
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- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
Nonprofit organizations and other charitable groups focused on worthy causes are always on the lookout for new ways to raise funds. Crowdfunding, an offshoot of crowdsourcing, is gaining traction as a tool for nonprofits and philanthropists to bring in money for particular causes.
Simply put, crowdfunding allows someone to raise a certain amount of money, usually via the Internet, in a specific time period for a particular project or cause from a broad pool of donors who share a common interest.
The idea has been around for some time, used by politicians (recall Gov. Howard Dean’s abortive 2007-08 presidential campaign), venture capitalists and artists to fund campaigns or projects. It is also a good way to expand networks and generate excitement.
Crowdfunding involves the creation of a web page on a third-party platform that describes the project and sets a fundraising goal to be achieved by a specific date. The initiator then promotes the campaign within his or her social network with the expectation that it will go viral.
Some platforms allow the initiator to keep all money raised, while others hold incoming monies in escrow until the fundraising target is reached and return it if the goal is not reached, according to an item by Tracy Kaufman on the Foundation Center website.
Contributors fund the project or business, they do not invest in it. “They are rewarded if the project comes to fruition, but don’t end up owning any part of the business or project,” Rich Brooks, president of Flyte New Media, a web design and Internet marketing company, wrote on socialmediaexaminer.com.
Nonprofits are obvious candidates to use this tool. But charitably minded individuals and family foundations are also using it for targeted fundraising drives.
Wealth advisors would be wise to inform themselves about crowdfunding. An increasing number of small family and donor-run foundations are beginning to use their foundations as platforms to raise money from other wealthy people who share their interest in a cause or campaign, according to Page Eberstadt Snow, chief philanthropic officer of Foundation Source, an outsourcing firm. Crowdfunding is one way families can leverage their foundations.
CauseVox and FirstGiving are two platforms charitable organizations use to mount crowdfunding campaigns. Another is SimplyRaise, a Denver-based outsourcing firm that takes the crowdfunding idea a step farther.
SimplyRaise brands to the initiating organization’s website, giving it the “look and feel” of the original site, the firm’s CEO John Baker told AdvisorOne in a telephone interview.
Say, for example, the John Doe Family Foundation, whose mission is to support education for children in low-income neighborhoods, wants to send a star chess team from an underfunded high school to a national competition. It calls this endeavor KidChessTrip.
SimplyRaise would create a site with the look and feel of the foundation’s own site, giving it the URL KidChessTrip@JohnDoeFamilyFoundation.org. The foundation would then promote this project to family and sympathetic friends and to its network of contacts. Visitors to the site could click on a button to contribute to the project, and SimplyRaise’s software would process the credit card donation.
Visitors to the special site could also create their own page to promote to their networks, thus expanding the crowd being asked for money. Crowdfunding can
Baker said that depending on the complexity of the particular project, SimplyRaise will charge about 4%.
Crowdfunding can help a charitable group raise a specific amount of money–if successful–for a project in a finite time period. It can expand the organization’s network and increase its donor base.
Several things are important for a crowdfunding campaign to succeed.
- Focus on a specific, narrow audience–a “passionate niche,” in Brooks’ words–will reach donors likelier to be sympathetic to the project.
- Kaufman says a kickoff event—drinks at a local bar, for example–will garner attention and make the project more memorable for attendees when it comes time to contribute.
- Kaufman says a brief video on the profile page can be very helpful in promoting the project. In the chess trip example, this could show members of the high school team engaging each other in speed chess matches.
- Communicate often. Because most people will be unfamiliar with crowdfunding, the initiator will need to use various communication tools to drive the target community to the site with updates about money raised or new information about the project. This is especially important, Brooks wrote, because many crowdfunding sites will feature projects based on the amount of traffic they draw and early success.
- Saying thank you for a contribution may prompt the donor to encourage others to donate, and thanking donors at the end of the project can solidify relationships.