By: William E. Kelley, Jr., LEED AP BD+C
What is “crowdfunding”? By definition, it is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.” Many individuals, groups, and small businesses (especially startups) have attempted to tap into crowdfunding as an alternate to loans, private financing, angel investors, or venture capitalists in order to launch new products, services, or business ventures.
As outlined in an article from Forbes.com, until last year, “crowdfunding sites were only permitted to operate on a reward or donation basis, essentially offering a product or enticement in exchange for monetary funding.” That prohibition may soon be obsolete, however, thanks to the launch of the JOBS Act, which is short for Jumpstart Our Business Startups. Under the JOBS Act, the SEC is empowered to issue regulations on crowdfunding, which set forth rules under which the general public can receive company equity in exchange for funding. Once the SEC issues those regulations, then crowdfunding sites may go beyond reward and donation basis funds, and offer would-be investors equity or other forms of return on investment.
So why should architects (or anyone in the construction industry, for that matter), care about crowdfunding? In what has been extremely difficult economic times for a lot of design and construction professionals, crowdfunding may provide an alternate approach to project financing. At least this is the theory examined by the American Institute of Architects (AIA) in a commissioned white paper titled, “Crowdfunding Architecture”. A copy of that white paper can be downloaded here.
“Crowdfunding Architecture” outlines the various models for crowdfunding, including donation-based and reward-based crowdfunding, and crowdfunding with financial returns. As outlined in the white paper, each of these models carries potential benefits and deterrents for investors and owners alike. For example, under the donation-based model, there is no tangible reward or return on investment for donors. Donors under this model have to be emotionally connected to the cause or project in order to be motivated to contribute financially. Projects seeking financing under this model also have to avoid potential pushback from doubters who question why no other financing or funding vehicle is available for this particular project. As the white paper notes, this model requires the most carefully thoughtful communications strategy and the most persistent communications effort.
“Crowdfunding Architecture” also addresses real life examples of crowdfunding used successfully and unsuccessfully for various projects. For example, after thunderstorms and tornadoes damaged buildings throughout Joplin, Missouri in 2011, a group known as Rebuild the Joplin Mosque organized a crowdfunding campaign, seeking $250,000 to rebuild the Joplin Mosque, which had been damaged not only by tornadoes, but also by fire damage that caused it to burn to the ground. The Rebuild the Joplin Mosque not only raised the $250,000 needed in one week, but it exceeded its goal, by raising more than $400,000. Through its crowdfunding site, the organizers disclosed that any proceeds above the $250,000 goal would be used to finance additional safety features, expansion of the original structure, and access roads.
Clearly the Rebuild the Joplin Mosque effort is a huge success story for crowdfunding. There are misses in the crowdfunding world as well. For example, “Crowdfunding Architecture” points to a Kansas City campaign to fund the KC Streetcar Starter Line. The campaign did not succeed, but not for a lack of community outreach or creative reward structures under the crowdfunding model. Instead, the campaign failed because its funding goal was $10 Million, and “Crowdfunding Architecture” notes that “for something like that to happen, a campaign needs intensive promotion way in advance of the campaign, and preferably a strong signal (a pledge of funds) that shows that the campaign has secured a considerable amount of pledges from day one.”
So can crowdfunding help launch stalled projects and give the design and construction industries a much-needed economic boost? Perhaps. The point made by “Crowdfunding Architecture” seems to be that small, community-based projects are likely the best candidates for crowdfunding, especially those with some tangible reward for investors and/or the presence of matching funding from other public or private contributors. In other words, crowdfunding might be good for communities looking to leverage available funds in order to take on larger projects that might not otherwise get off the ground without other funding. “Crowdfunding Architecture” also touches on some of the potential risk and liabilities for organizations seeking to utilize crowdfunding. Organizers cannot expect to set up a crowdfunding site and simply wait for the funds to roll in. Successful crowdfunding campaigns involve a tremendous amount of planning and effort.
It will be years before we can fully analyze whether or not crowdfunding will serve as a viable financing tool for design and construction projects. At the very least, though, it is a creative approach to the question of how to jumpstart not only small businesses, but also design and construction projects.