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More turn to crowdfunding to help deal with unexpected debts

Second grade teachers Jocelyn Benford (left) and Melissa Farran post a project request on DonorsChoose.org for their students.
Landon Dowdy | CNBC
Second grade teachers Jocelyn Benford (left) and Melissa Farran post a project request on DonorsChoose.org for their students.

In a perfect world, a household will have a cushion of emergency savings for whatever life throws at them.

But, more and more, Americans are turning to crowdfunding websites to make ends meet after misfortune strikes.

Charity crowdfunding sites like GoFundMe and Generosity.com allow users to solicit donations for charity or personal causes. Scroll down a Facebook feed long enough, and you'll discover family members and friends-of-friends crowdfunding to defray the costs of medical treatment or mitigate the losses from a flood or a fire.

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Rob Wu, founder of crowdfunding platform CauseVox, believes America can do a better job with social-welfare policy. Until then, he said crowdfunding can open doors that might otherwise be closed. He raised several thousand dollars to help a friend who was stabbed several times during a mugging and had no health insurance.

"Crowdfunding is an easy way to connect people together to lift up each other and their communities when it matters the most," Wu said.

Many crowdfunding campaigns fall well short of their goals. GoFundMe boasts a total of $3 billion raised for its campaigns, and its largest campaign in 2016 raised nearly $8 million for the victims of the Pulse nightclub shooting in Orlando, Fla. But the average GoFundMe campaign raises about $1,000.

Meanwhile, an average three-day stay in a hospital costs $30,000, according to Healthcare.gov.

Big community and a compelling story

"Crowdfunding isn't free money, and when you create a crowdfunding campaign, there's no guarantee that you'll meet your fundraising goal," Wu said. The two biggest determinants of success in charity crowdfunding are a large community and a compelling story, he said.

Ethan Mollick, assistant professor of management at the Wharton School of the University of Pennsylvania, has researched the entrepreneurial side of crowdfunding, on sites like Kickstarter where only 48% of campaigns succeed and a single typo is enough to slash a project's chances by 13%. And there is a crossover between the best practices for business and charitable crowdfunding, Mollick said.

"You need to be part of a community going in," Mollick said. "That community is the basis for your success. They have to know what you're doing and respect it."

That can mean friends and family, or groups with shared interests, but the more people a campaigner knows, the more social capital they have to transform into crowdfunding money, he said. In return, donors want to know where the money's going, Mollick said.

Follow-up correspondence helps the campaigner show accountability and can encourage donors to give again if there is an ongoing need. Last November, the Ferguson Municipal Public Library in Ferguson, Mo., sent an email digest to the 12,000 people who donated $450,000 to the library, explaining with photos how they spent the money.

Not everyone who crowdfunds for emergency expenses knows how to run an elaborate social media marketing campaign – but they don't have to, Wu said.

"What matters the most is the story," he said. "Instead of just being transactional and asking for a donation, focus on people. Make your story personal, relatable and credible so others are compelled to make a donation."

Presentation matters, Wu said, but a series of high-quality photos or a voiceover can tell a crowdfunding campaign's story in the absence of a professionally-made video.

Mollick cautioned campaigners to ground their expectations. There's no sure-fire formula for a viral campaign, and most people do not enjoy the runaway success of headline-grabbing fundraisers.

"Most projects fail by a lot or succeed by a little," Mollick said. "Don't aim for viral, you're not likely to get it."