More on Nonprofit Crowdfunding – Is it leaving the little guy out?

In  my September 13, 2013 post, Crowdfunding for Nonprofits - Hype or Hope, I presented an overview of this form of funding development. This follow-up offers a more in-depth look at how the process is evolving to provide better structure, protection and validation for both donors and nonprofits and some of the pitfalls of that process, particularly for smaller organizations.

The visible problem  

In the above post, after viewing some of the websites catering to this funding model I stated:

 " There didn't seem to be a lot of vetting of the projects and nonprofits for the donor's peace of mind. In some cases, there was no way for the donors to receive an accounting for whether the money actually resulted in tangible gains or completed projects."

Apparently I wasn't the only one who spotted this weak spot. Now there are various approaches to deal with it.

Anything that deals with collecting and spending OPM (other people's money) is generally viewed with some reservations by would-be supporters. There is a good reason why the California legislature is moving forward to pass a law to crack down on what they see as fraudulent fundraising practices in the charity sector.

That's one way to approach the problems of donor exploitation. Another way is for the industry itself to define parameters by which such campaigns can be vetted. It's the old government vs. private enterprise argument. Should government impose a one-size-fits-all regulation, or can the industry police itself?

Public perception vs. reality

Nonprofits on the whole don't want to cheat anyone. Not the donors, not the beneficiaries of their goods or services, and certainly not the nonprofit community as a group. The problem is that one well-publicized bad apple experience taints the whole sector, and no one understands that better than the nonprofits themselves.

The public, perhaps naively but certainly vociferously, demands that nonprofits, like Caesar's wife, be above reproach. They might shrug off insider trading on Clorox as an isolated event, but just let a charity slip up once, and the whole sector gets a black eye.

Then there is the public perception of what constitutes charitable giving. The Nonprofit Times in an article published June 1, 2014 notes that  donors seem to be having trouble differentiating between funding and fundraising.

Measuring honesty

Legitimacy is the keyword, but to have legitimacy, you have to have a standard.

Enter the Accountability Review Wizard as designed and distributed by  the Charities Review Council. This tool seeks to bring uniformity and legitimacy to a rating and certification process.

In a April 16, 2014 posting on the hosting website, the Charities Review Council states that this is the only cloud-based risk and assessment tool currently available. In addition, they promise to provide resources to assist charities to advance to meet the optimum standards.

This fee-based service requires that the charity have the usual documents to verify organizational and financial  legitimacy, and seems fairly reasonably priced, at .02% of the organization's annual operating expenses, rather than total revenue, and ranges at present from $100 to $3,000. That should make it affordable even for smaller charities.

Arguably, someone should also address the vetting of the platforms on which campaigns are posted. Enter the Crowdfunding Bill of Rights developed and sponsored by David Neff and Miriam Kagan and profiled on the Kimbia.com website. For a more in-depth look at this proposed toolkit,  check out the entire article in The Nonprofit Times referenced above. While this is primarily slanted at the donor, it does peripherally note that the fees charged by some of the platforms are quite high.

All this is a step in the right direction. The internet has a well-deserved reputation as a hotbed of scammer activity. Anything that is perceived as or results in reducing the risk for donors or investors is surely better than nothing.

 Or is it?

Are we measuring the right things?

The one problem I see with all of this is the attempt to define what constitutes an acceptable level of administrative costs vs. program investment.

The California legislature ran into this problem when crafting their law. Originally they had a set-in-stone ratio of program spending vs. administrative and fundraising costs. After some educational meetings with nonprofits, they discarded that number.

The problem arises when looking at the vastly different mission requirement costs for nonprofits, and the public perception of what is "good".

No matter who or what agency tries to arrive at that figure, it is going to result in assigning an arbitrary number as the optimum standard. That number will then be the benchmark for the general public to judge which organizations are "good".

This isn't a new problem. Every nonprofit rating website has some sort of arbitrary standard they use to assess nonprofits. That can be anything from a cost ratio tied to the revenue figure of the organization to the dollar figure of the key personnel salaries.

The problem there is that it doesn't necessarily present a total picture of your organization.

A nonprofit delivering a healthcare service may have salary and labor costs in excess of 50% of their operating budget due to the legal requirements to employ highly-trained licensed professionals. A all-volunteer group that collects food, clothing or books for the underprivileged may not have any salary costs, but  does pay out a substantial portion of the budget for fundraising to purchase the items distributed. Very new organizations may have high initial development vs. program  costs.

The above-noted Accountability Review Wizard, as a part of their method to assign a rating, does attempt to address this by having a range of acceptable program spending levels from 65 to 90 percent,  but even in that framework, they suggest that a 90-10 ratio of program to administrative spending ratio is the most desirable.

That just seems to further the notion that all nonprofits have to be broke to be effective.

And therein lies the problem with crowdfunding, particularly if it is an all-online event.

The strategy, which is growing exponentially year-over-year in dollars invested in charitable giving, needs to be more about educating the public.

That doesn't mean that developing these benchmarking strategies is ineffectual or wrong. They just don't go far enough.

Is there a logical next step?

To address that shortcoming, if you think it is a shortcoming, the nonprofits themselves need to be actively involved in providing educational tools that go beyond dividing numbers attained from the 990 or the financial statements to arrive at ratios.

For instance, should the mid-six figure salary of a CEO whose organization requires the holder that position to have multiple master's or doctoral degrees be equated to the $10,000 salary of a  CEO who oversees a newly-formed  local conservation group? The former may only utilize 1% of the organizations funding, while the latter might currently account for 40% of the revenue. Do the ratios tell the whole story?

What's acceptable should be somehow tied to the type of nonprofit and it's relative chronological development as it relates to effectiveness.

In that way, a donor, whether through crowdfunding or more traditional avenues, could assess whether the effectiveness of the organization is improving with the modifiers of age, growth and revenue. Is bigger better?  Should donors fund  developing management expertise in favor of programs during the first five years of the nonprofit's existence?

What about you?

This is an area that the nonprofits would seem to have to move from passive acceptance of other's standards to active participants in shaping those standards. Larger organizations know that, and some of them are doing it, thereby shaping the dialogue.

Smaller and newer nonprofits have a stake in this too. Crowdfunding is evolving into something much larger than a simple social media posting event. The organizations that stand to benefit the most are the little guys, the ones that can't immediately access large grants.

Your messaging needs to address the issues being debated and codified on a national scale by these larger platforms. Even if you choose not to be evaluated, you ignore current trends in shaping public perception at your peril.

You are the folks that constantly contact me to bemoan the fact that you can't compete in the traditional grant marketplace. This is your chance to make the dialogue about effective outcomes, not financial ratios. Make the most of it.

If you need help crafting a message, contact me at granthelp@ida.net, or visit my website at http://www.cloudlancerwriting.com.