One area ripe for this type of partnership is crowdfunding, an alternative form of finance where money can be raised online through a crowdfunding platform (CFP) from friends, family, extended networks, and—thanks to Title III of the Jobs Act passed last year—investors. Hailed as the democratization of finance, individuals, non-profits, and companies have turned to crowdfunding to fund new projects, engaging their networks in the process, and enabling the community to curate ideas and fund over $2.6 billion in 2012, according to Massolution’s 2013CF Crowdfunding Market: Software and Solutions Report.
If you combined government’s ability to convene and accelerate projects globally with the crowdfunding platform’s ability to engage local communities and investors in projects, you would have a potentially game-changing impact on grassroots diplomacy and development. Why? Because in an era of budget cuts, the value that government brings to the table has shifted from funder to partner. And crowdfunding provides the ultimate platform for government to convene partners in the private sector and civil society around locally driven solutions that need financing. The model of government as the primary funder for social good initiatives is evolving as public-private partnerships, where corporate or non-government partners bring their resources and expertise to the table, are stepping in to provide pro-bono technical assistance, infrastructure, distribution channels and training to help address complex challenges such as youth unemployment, access to education, and global health.
There are three ways government can test-drive crowdfunding (and see if the democratization of finance is all it is cracked up to be).
1. Crowdfund a government innovation fund
Savvy diplomats have started to test the waters and cull collective intelligence, creativity, and knowledge through crowdsourcing efforts like USAID’s launch of Grand Challenges for Development and prize competitions. The next step in engaging the crowd and leveraging resources is to pilot crowdfunding through one of the government’s innovation funds. The idea is simple, partner with a crowdfunding platform to leverage government investments, engaging the community, donors, and subject matter experts to make government funds more catalytic. For those seeking funding, making it through a government-vetted competition lends credibility to projects that need an additional round of funding from other investors. While there is no shortage of viable projects that seek support from government innovation funds, there is a shortage of capital. Crowdfunding platforms provide a solution, and a market, for those great ideas.
2. Reach beyond the United States
Crowdfunding is not new. Artists, entrepreneurs, students, philanthropists, and caused-based groups have been tapping into their networks and online platforms for years to help finance their efforts. What diplomacy can do is help take this phenomenon global. While crowdfunding originated in the U.S. and is on the rise in the region (over 72 percent of crowdfunding in 2013 is predicted to stem from the U.S.), the real potential is to provide alternative financing to projects and businesses in emerging markets. The World Bank’s preliminary estimate of the potential crowdfunding market in developing countries could reach over $95 billion in the next 25 years. If the platforms that have democratized funding in the U.S. can scale globally, we will see more locally driven solutions to regional challenges that take projects and businesses global, potentially loosening up billions of dollars in capital and spurring economic growth.
3. Incubate locally; educate globally
Development agencies, such as MCC and USAID, have identified local ownership of projects as key to their success. If local communities make the best incubators for local solutions, then building local capacity through providing crowdfunding education and training to emerging markets is essential. Government can mobilize partners globally, help support enabling environments for crowdfunding, and provide access to educational resources and training, ensuring they reach those in need of access to alternative finance. Successfully running a crowdfunding campaign means developing new skills to help sustain an initiative—how to market the idea, engage the audience, and tell a compelling story. Crowdfunding can help incubate and support local solutions to local challenges, develop capacity of new partner organizations, and help raise the profile and sustainability of a program, initiative, business, or cause.
Next steps for crowdfunding globally
While crowdfunding is on the rise in the U.S., United Kingdom, and Australia, limitations to global growth exist. Two key issues require further attention to responsibly and effectively accelerate growth: protection against fraud and the know-how to implement projects once they have been funded. While crowdfunding fraud cases are low—the public nature of campaigns, combined with the collective intelligence of social media and consumers serve as a check on spurious projects—ensuring proposals are viable should be a priority for any government piloted crowdfunding initiatives. This means partnering with a reputable crowdfunding platform that can work directly with government to help curate proposals (whether cause-based or business-oriented), vet potential recipients, and provide training to project leaders on how to successfully leverage crowdfunding.
The question remains: What ensures a project will be sustainable beyond initial government funding? Addressing this requires providing educational tools and training from experts on how to successfully run and implement a crowdfunded project. A challenge echoed across the globe is that community projects, non-profits and small businesses lack the expert backing, technical skills, network and capital to implement funded projects in a sustainable or scalable way. Government support of crowdfunding should include partnerships that invest in training and capacity building of those leading crowdfunding projects. The acceleration of crowdfunding globally needs to be met with donor and investor education, the adoption of due diligence practices that help root out fraud and partnerships that can help transfer skills and best practices to those seeking to develop projects. Is crowdfunding a panacea in the new era of fiscal austerity? No, it is another tool in the arsenal of diplomacy that can help do more with less, engage local communities in solutions and sift out the best ideas on open and global platforms. It may not change the way government does business, but it deserves a try.
Daniella Foster is Co-founder and CEO of the Emergent Leaders Network and Director of Public-Private Partnerships at the State Department.
This article was originally published in the Diplomatic Courier's January/February 2014 print edition.