Interview with Prince Baah-Peprah on alternative finance & citizen crowdfunding.

Crowdfunding started out as a do-it-yourself way to raise money quickly. Today, it is an industry of billions. How can crowdfunding be used safely and effectively when campaigning for social causes? We asked Prince Baah-Peprah of the University of Agder in Norway, who specializes in alternative finance.

“What explains donor behaviour more than anything else is a sense of community.“

Over the past decades, crowdfunding has become an industry of billions. Where does the practice stand today, do you think?

“Crowdfunding started out with asking friends, family and others for money, to see who could help you out with a cause. But today, the practice is maturing. Crowdfunding isn’t limited to donations, it can take the form of equity and lending. Still, when you ask people what crowdfunding is, most will answer ‘free money’. Rather, donors should be considered investors – stakeholders in a project that often doesn’t just affect the fundraiser, but an entire community.”

What is the best way to campaign for crowdfunding action and get people involved?

“Almost all of the academic research that looks at why people invest, concludes that it depends on how happy it makes a donor. But new research suggests that the question of how it affects a community is much more indicative of crowdfunding success. I am currently part of a study that collected data from more than 500 investors in Finland. As it turns out, what explains donor behavior more than anything is that sense of community.”

“With sustainability or health issues, the result of such a crowdfunding project is beneficial to the whole community. Let’s say you were to invest in solar panel development in your own area. The aim is to reduce energy shortage. Now you’ve created a community, where everyone owns something together. So let’s go back to the drawing board and push that community aspect to the forefront.”

What is the biggest challenge in crowdfunding today?

“Ethics is a big one. In the UK and the US, on world renown platforms like Kickstarter, societal campaigns have been launched that purportedly raised money for issues that never existed, like people who claimed to have diseases they never had.

‘Regulations are often taken for granted. People think that what is right, is ethical: they’ll think a good cause is by definition right. But it doesn’t work that way. If you want to guarantee safe passage of money, you need to understand the concept of ethics from a fundraiser, platform and investor perspective. A fundraiser on a platform is under quite a bit of pressure to succeed. There’s a fear of failing publicly, which can lead to misleading information in order to achieve success, to promote a campaign.”

What responsibility do platforms have in this?

“Many crowdfunding platforms are new, they are focused on profitability – the cut they get from the campaigns. So the platform itself tends to take on a campaign and promote it, even if it doesn’t appear credible. It could help if the intermediary considers the model it uses. Do fundraisers have to pay everything back to platform users if they don’t reach the goal? Or is it enough to reach only part of the objective?

Another improvement could lie in marketing, a responsibility carried by both the fundraiser and platform. Some of the platforms offer campaign advice to users, but not all of them. And every campaign has a different situation. People tend to skip campaign development. Many have confirmed that it’s done on intuition, rather than experience. That can lead to failure. Platforms also need to do critical analysis, their experience is limited. So that over time, such issues will decrease.”

Rebel Group advised a Dutch children’s hospital on how to set up a crowdfunding platform to supplement bank loans and other institutional financing. Could that mix be a model for the future?

“It has been done in other countries, and it is definitely allowed in many jurisdictions. I know of one case in South Africa around solar panel development. They went to the bank for part of the funding and raised the rest from the public. It signals to the crowd: there’s already a big time investor on board, our idea is credible. This model actually enhances trust and credibility. It can work the other way around too: traditional investors may hear that the public supports your idea, and jump aboard.”

Won’t strict financial regulations hinder such efforts?

“That’s definitely a challenge, regulations can be strict. Although so far, none of these private-public investment projects have been shut down by regulators, as far as I know. Bear in mind that regulations always follow new innovations. We’ve seen an easing of restrictions in recent years and I believe that will continue.”

Lessons from Prince Baah-Peprah

• See your crowdfunding project from a community perspective, as it will enhance stakeholder commitment
• Get advice from platforms or outside experts on how to develop an effective campaign
• Regulations can make crowdfunding tricky as a supplement to traditional financing, but they will continue to ease, adapting to the industry