Crowdfunding

Crowdfunding is the practice of seeking financial backing for a project or venture by raising small amounts of money from a large pool of online donors.
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Revolving funds
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Relevant case study

Difference between traditional funding and crowdfunding. Available at: https://advantiss.com/crowdfunding-platforms-how-are-they-built/

Description

Crowdfunding is the practice of seeking financial backing for a project or venture by raising small amounts of money from a large pool of online donors. Crowdfunding initiatives require only a small monetary contribution by each citizen that can add up to significant amounts. Funds raised can go towards financing the improvement of city services while at the same time gathering data from its citizens about their sentiments towards certain initiatives. This data can inform city governments of trends, preferences, and behaviour patterns within their community, improving the way local authorities serve citizens.

Enabling Conditions and Key Considerations

  • Clear guidelines for the type of projects that qualify for crowdfunding and range of crowdfunding budgets should be established. Clear guidelines would need to be established to ensure that agencies or local governments continue to provide essential public services and turn to crowdfunding as an additional form of support rather than a default funding source. The size of funding that can be raised via crowdfunding and the modalities through which stakeholders that should be engaged for fundraising should be set out clearly in the guidelines.
  • Clear guidelines and regulations for how funds raised are used and managed should be communicated to stakeholders. For crowdfunding campaigns to be successful, clear guidelines must be issued for how the funds raised are used and managed to avoid misuse of funds and corruption that will in turn erode public trust in the crowdfunding process. Not only would the processes for fund disbursements need to be transparent with clear accountability, but the management of unused funds would need to be clearly accounted for as well. This would include the treatment of excess funding collected as well as funds collected for projects that are eventually aborted.
  • Tax rules for monies collected via crowdfunding should be established. To ensure that funds collected through crowdfunding are used for their intended purpose, tax rules that guide the collection of such funds – both for the donor and collector – would need to be clearly established.

Potential Challenges

  • Lack of government experience. Government officials may have limited experience in designing crowdfunding campaigns that can garner strong public interest and support. For crowdfunding campaigns to be successful, the objectives of the project and how the funds would be used to benefit the community or beneficiaries would need to be communicated clearly to the public and social media campaigns are often necessary to publicise the campaign.
  • Cost of managing a crowdfunding campaign. Crowdfunding platforms and payment providers would charge fees to use their platforms or services to collect and direct the funding. This could pose a significant issue given the small size of individual donations in a crowdfunding campaign. The city government would need to find means to optimise the financial collections without “losing” a significant portion of donations to intermediaries.
  • Might not be accessible towards some parts of the population. Crowdfunding is a relatively new approach towards raising funds for public projects and the use of digital platforms to raise funds could alienate some parts of the population which might lack digital capabilities to access such platforms or have less trust towards online fundraising campaigns – especially given the prevalence of scams in the online space.

Potential Benefits

  • Enables financing to be raised quickly for small-scale projects. A well-publicised and successful campaign could quickly raise funds for small-scale smart city projects and allow these projects to be implemented quickly. This could make crowdfunding more effective than seeking government funding for the same projects as the use of taxpayer money could be subject to more formal processes and longer approval periods.
  • Directs funds to projects prioritised by citizens. The nature of crowdfunding means that citizens are free to only support projects that they find useful and valuable for their community or the intended beneficiaries. This means that the most critical projects deemed to best meet the needs of the community or specific beneficiaries would be prioritised.
  • Enables governments to collect data on public sentiments. Crowdfunding campaigns can be a channel for governments to gather data on the preferences and sentiments of citizens towards certain initiatives. The data can be used to inform city governments of trends, preferences, and behaviour patterns within their community, improving the way local authorities serve citizens.
  • Could create a sense of ownership and empowerment within the community. When funding raised from a community is used to support beneficiaries within the community, it can create a feeling of participation in contributing towards the outcomes of the project. Community members are also more likely to support the project in non-financial ways if they feel a sense of ownership and empowerment, increasing the project’s likelihood of success.

Sources/Additional Information

Case Study

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