Caution! The Downsides of Crowdfunding

Mikey Bolts, a YouTube personality and comedian, had a plan for an unusual crowdfunding effort: If donors chipped in a total of $5,000 for the Susan G. Komen breast-cancer charity, he would conquer his fear of heights by skydiving while wearing a Power Ranger suit.

Posting the challenge on Darelicious, a new site that raises money based on dares, Mr. Bolts said he wanted to do it for his grandmother, “the most influential person in my life,” who had died of breast cancer.

The campaign raised only $3,240, but Mr. Bolts decided that was enough—and last spring he made the leap dressed as a Green Ranger from the superheroes television show, accompanied by friends dressed like Superman and Batman’s sidekick, Robin.

A YouTube video of the jump has been viewed more than 600,000 times, and many commenters on the Darelicious site praised Mr. Bolts’s charitable efforts, some mentioning their own loved ones who had battled cancer.

There was just one hitch: Susan G. Komen, which has strict rules about how its name and logo can be used, had no idea it was going on—and Jorge Hernandez, Darelicious’s founder, contacted the organization multiple times before the two sides agreed on a way to hand over the money.

Like Mr. Hernandez, many people are learning by trial and error as crowdfunding, or the pooling of online donations for a specific project or cause, soars to new and unfamiliar heights. The phenomenon is raising financial, legal, and ethical questions that some experts say the nonprofit world has not fully grasped.

“It’s almost like the early days of the gold rush,” said Miriam Kagan, a fundraising strategist for Kimbia, a company that provides online-giving technology. “Everyone rushes in,” she said. “Then everybody says, Oh, no, look at the mess. We need to get some order.”

Ms. Kagan recently helped draw up a Crowdfunding Bill of Rights to set rules for ethical fundraising. It asks campaign organizers to provide regular progress reports, be transparent about fees, spell out what happens if a project doesn’t meet its goal, and follow through on any promises of perks.

“Nonprofits need to be thinking about this yesterday,” she said.

Mr. Hernandez eventually gave the skydiving proceeds to Susan G. Komen’s national office after trying unsuccessfully to get an appointment with the charity’s Los Angeles County affiliate, where he wanted to discuss future joint fundraising efforts.

He said his initial forays have taught him that he should consult charities before a celebrity makes a dare: “It definitely makes more sense to have the nonprofit buy-in from the beginning.”

Data on nonprofit crowdfunding are hard to come by, but people generally point to a 2013 study by Massolution, a research and consulting firm, that found “social causes” drove almost 30 percent of all crowdfunding activity, the largest category. It projected that crowdfunding campaigns, including those for commercial ventures, would raise $5.1-billion last year worldwide—up from $2.7-billion in 2012. The firm plans to issue an updated report at the end of the year..

Darelicious, which has been operating about a year, joins a slew of commercial sites that raise money for nonprofits or causes while taking a slice of the pie. The sites include CauseVox, CrowdRise, FirstGiving, and Razoo.

Big Money

Some have big money and big names behind them. Indiegogo has raised more than $56.5-million in venture capital since it began operating in 2008. Its investors include the British tycoon Richard Branson and PayPal co-founder Max Levchin. CrowdRise—which chief executive Robert Wolfe said has raised about $140-million for nonprofits since 2010 and is on track to bring in $125-million more this year—was co-founded by the film producer Shauna Robertson and the actor Edward Norton.

Small nonprofit sites are also getting into the act by appealing to niche audiences: LoveAnimals.org, for animal charities; HIPGive, for Latino organizations; and Jboost, for antipoverty programs that benefit greater Rhode Island Jewish communities.

All of the upstarts join nonprofit sites that began operating before the term “crowdfunding” gained currency—like Charity: Water, DonorsChoose.org, Kiva, and Modest Needs, all founded from 2000 to 2006 to raise money online for specific people or projects.

Media reports often spotlight crowdfunding success stories, many about spontaneous efforts to help someone, like the Indiegogo campaign that raised more than $700,000 to give a vacation to a bullied school-bus monitor. The San Diego Opera raised more than $2-million to help keep its doors open last spring in a campaign that drew national attention.

Dark Side

But the dark side of crowdfunding is also starting to get more attention. Washington’s attorney general, Bob Ferguson, filed in April what he said was the first state consumer-protection suit against a crowdfunding project. He charged that a Tennessee company raised more than $25,000 on Kickstarter to print a deck of “retro-horror” theme cards but failed to deliver them or return the money.

GoFundMe, which specializes in raising money for individuals with illnesses or other crises, in June suspended a campaign for a girl with scars on her face who was allegedly asked to leave a KFC restaurant because she was disturbing other customers. After KFC issued a statement saying it found no evidence the incident ever happened, GoFundMe said it would investigate and donors could request their money back.

Reports like that do not surprise Keith Taylor, the founder of Modest Needs, which provides emergency loans to low-income people. He said his charity spends hours documenting that the individuals it helps are genuine—and money from donors goes directly to pay their rent, utilities, or other bills.

“One of the hardest challenges we face is trying to help donors understand what separates us from your standard crowdfunding site,” he said. “People are emotional creatures. They’re moved by the images they see. All of a sudden truth doesn’t matter. It’s all about how you feel.”

Unpredictable Giving

Indeed, the crowdfunding craze confirms what many nonprofits already know: that giving is not always rational. Exhibit A: A Columbus, Ohio, man started a Kickstarter project to raise $10 so he could make potato salad and ended up attracting more than $55,000 from 6,911 backers.

As that campaign gained huge publicity, Thomas Harvey, executive director of ArchCity Defenders, a small legal-aid charity in St. Louis, seethed.

“I was really mad when I saw it, that something so ridiculous had raised so much money in such a short amount of time,” he said, “when we’re always trying to raise money and expand our services to the indigent.”

Mr. Harvey went to the store, bought a tub of potato salad, made an iPhone video, and set up a Kickstarter page to raise $15,000 to make a video series about the impact of the justice system on homeless people.

“It’s not potato salad, it’s a film about ending homelessness,” said his campaign page, which attracted $2,127 in pledges. Under Kickstarter rules, Mr. Harvey got none of the money because he didn’t reach his goal.

Rose Spinelli, a crowdfunding consultant who was in touch with ArchCity Defenders about the campaign, said projects that tried to capitalize on potato-salad fever (Mr. Harvey was not alone) failed because they lacked originality. “The potato salad wasn’t the problem,” she said of Mr. Harvey’s effort. “The problem was they didn’t tell their story well.”

Mr. Harvey, who eventually removed the reference to potato salad from his page, said he doesn’t regret the effort because it raised awareness of his cause.

Failed Efforts

The majority of crowdfunding efforts fail to meet their goals, experts say, and sites have different rules about what happens in those cases.

It’s all or nothing with Kickstarter. Nonprofits can get all of the money they raise on Indiegogo but must pay higher fees if they fall short of their goals—10.75 percent of donations instead of 7 percent.

CrowdRise, which hosts fundraising campaigns by Boston Marathon teams and other high-profile causes, does not require projects to meet specific goals. CrowdRise takes from 3 to 5 percent of donations.

Charities take different approaches to working with third-party crowdfunding sites. Big groups like the American Red Cross and the Nature Conservancy now raise money on CrowdRise.

But Susan G. Komen, which gives supporters online tools to set up their own fundraising pages, has kept its operations in-house. Oliver Freund, director of operations at the charity’s Los Angeles County affiliate, said he has been contacted by at least five crowdfunding startups in the last year that wanted to explore fundraising partnerships, including Darelicious, which charges 15 percent, including credit-card fees, for all donations.

Because younger people “get very excited about these viral platforms,” he said, his group has not ruled out such arrangements, but it would want to be sure the fees were “crystal clear” to consumers.

As crowdfunding sites proliferate, some nonprofit experts wonder about the long-term impact on the way people give.

Broad Shift

Katherina Rosqueta, executive director of the University of Pennsylvania’s Center for High-Impact Philanthropy, said crowdfunding epitomizes a broader shift, especially among millennials, who are looking for concrete ways to make a difference and may not be loyal to any single charity. Mr. Wolfe of CrowdRise said younger donors like the social-network aspects of CrowdRise because they “want to be part of the community. They want it to be fun.”

Center for High Impact Philanthropy

The emphasis on individual projects worries Allison Fine, a nonprofit and social-media expert who hosts a Chronicle podcast. She faults DonorsChoose, for example, for asking the public to help teachers buy classroom supplies while not advocating to improve the public education system. (While DonorsChoose does not engage in advocacy, Missy Sherburne, its chief partnership officer, said that for a couple of years the group has made data available from the teachers who request money so policy makers can see where needs are the greatest.)

“We’re really good at raising awareness of issues and clicking to help a person immediately,” Ms. Fine said. “But these efforts don’t connect to the longer, harder work of systems change and policy change.”

In any case, the crowdfunding explosion could help researchers learn more about “the charitable spirit,” said Ms. Rosqueta. Philanthropy is usually measured by donations to 501(c)(3) charities, but the new sites highlight other ways that people give, she said. “It might help all of us,” she says, “get a more accurate picture of the giving that goes on in society.”