What is Reward-Based Crowdfunding?
Reward-based crowdfunding allows you to accept funds from individuals who receive some type of reward in return. Successful crowdfunding platforms like KickStarter and IndieGoGo help people raise money for a project or a cause by encouraging support of anyone interested in the fundraising campaign. Anyone can fund your reward-based crowdfunding campaign…and you don’t typically have to pay the money back.
The average donation is $99, though you’ll typically see a range of $5 to $500 or more for a business raising financing. Unlike equity crowdfunding, which gives crowdfunding investors equity in your company, with this type of crowdfunding, you retain full ownership, and you don’t have to pay back the money you raise in your crowdfunding campaign.
Reward-based crowdfunding also differs from venture capital or equity crowdfunding in that the people who back your campaign do not have ownership or rights to give you investment advice about your business. This leaves the control of your business in your hands.
To be successful, though, you have to be very good at marketing and present your product/business in a way that resonates with people and spurs them to donate. You will likely need to start with getting backers from your friends, family and fans.
Crowdfunding Pros and Cons
- You don’t pay back your backers — you reward them with a token of appreciation
- Great way to validate your product with future customers
- No need for collateral, high credit scores, or other qualifications
- Startup friendly
- If you don’t raise at least your goal amount of money, your business may not get any of the funds, depending on platform rules
- Takes a lot of preparation + marketing effort
- Fees and marketing costs can add up
- You may owe taxes on the amount raised
Reward Crowdfunding Pros
By far, the biggest appeal of reward crowdfunding is that you aren’t taking out a loan you have to pay back. Instead, you offer perks that are commensurate with the level of donations. While many rewards involve a physical product, that’s not the only option. Someone who donates $5 might get a shout-out on social media, while someone who contributes $1,000 might get named in your film project.
If you’re testing out a new product, crowdfunding is a great platform to get feedback from your audience. If, despite heavy marketing efforts, you don’t draw in potential backers, you might want to reconsider the product you want to launch. You save time and money knowing this before it goes to market.
And finally, crowdfunding options like Kickstarter or Indiegogo are popular because they don’t have the stringent requirements that come with SBA loans, traditional small business loans, lines of credit, and even business credit cards. You don’t need high business or personal credit scores (they’re not even involved in the application process). You don’t need collateral, the way you might with a loan. And you don’t need to have been in business a certain number of years to qualify.
Reward Crowdfunding Cons
Do keep in mind that with some platforms (like Kickstarter), if you don’t raise your goal amount, you won’t get the money at all. (This is often referred to as “all or nothing.”) It might be wise to set a goal you know you can reach and hope for more. Make sure you build in enough to fund your product and to cover marketing costs, taxes and fees.
Many businesses think if they post a crowdfunding campaign, the money will come rolling in, but in fact, it requires heavy marketing to attract potential backers and donors, so make sure you’ve got the resources needed to get the word out.
Another drawback to consider is those fees that global crowdfunding sites will charge, as well as the payment processing fees. Be sure to budget them into your goal.
Best Reward-Based Crowdfunding Platforms
If you’re considering launching a crowdfunding campaign, you’re probably wondering where to start. There are several crowdfunding platforms to consider, each with its own benefits. Here are the top two:
Kickstarter is the largest reward crowdfunding platform, with more than $5 million pledged to Kickstarter campaigns.
Kickstarter Terms, Fees, and Requirements
In terms of requirements, Kickstarter projects must create something to share with others. You can’t raise for charity, and you can’t offer equity. Be sure to read through the list of prohibited items before launching a campaign.
Kickstarter campaigns are all-or-nothing, meaning if you don’t hit your campaign goal, you will get none of the funds pledged.
In terms of fees, Kickstarter takes 5% of the funds raised, and the payment processing fees are 3-5% per pledge.
With more of a focus on raising funding for innovative technology and design, Indiegogo has brought more than 800,000 ideas to life since 2008.
Indiegogo is different from Kickstarter in that it offers two types of campaigns: Flexible Funding allows you to keep the money raised, whether you hit your target or not. Fixed Funding only allows you to access the money raised if you hit your funding goal.
Indiegogo Terms, Fees, and Requirements
Indiegogo is open to for-profit campaigns as well as nonprofit organizations, campaigns for products, educational campaigns in technology, and anything that is not a personal cause. There are guidelines on what you can and can’t offer as perks to donors.
Indiegogo also charges 5% per campaign, as well as 2.9% + $.30 to process each payment.
There are a variety of other platforms that may be right for your business.
Best Candidates for Reward Crowdfunding
So, who is reward crowdfunding good for? A wide range of businesses, actually. If you find it challenging to qualify for a traditional business loan because your credit scores are low, crowdfunding might be for you. (Check your business credit scores here.) Types of businesses who can benefit from reward crowdfunding include:
- Businesses with a compelling B2C product
- Companies with a great business pitch
- Businesses looking to validate their business idea
How Does Reward-Based Crowdfunding Work?
Once you decide on the online crowdfunding tool you want to use, you’ll create an account and then set up your crowdfunding campaign. You’ll be asked to fill out details about what you want the money for, how and when you will use it, and what attractive rewards you’ll offer in exchange for donations.
Keep in mind: the more detailed you are, the more backers you will attract. The most successful campaigns have plenty of useful content and usually a video as well. Try to address:
- What makes this product or project unique
- How specifically you will use the funds
- If it’s for a new product, when the product will be launched
- What milestones you will have
Choose an amount for your goal carefully. If the site is an all-or-nothing site like Kickstarter, it may be better to set a lower goal you are confident you can exceed. That way, you get all of the money raised.
Another key: before your campaign launches you should already have a way to contact backers for your project. Kathleen Minogue, the founder of Crowdfundbetter.com puts it bluntly, saying: “YOU MUST FIND YOUR BACKERS BEFORE YOU LAUNCH!” (Yes she puts it in all caps because it’s that important.)
Once your campaign is set, plan to amplify it across your marketing channels like social media, email, blog, and advertising to maximize the number of potential donors you reach.
Best Crowdfunding Reward Ideas
When it comes to what you will give your backers as a thank-you for their contribution, know that crowdfunding success often comes from offering really enticing and creative rewards.
Because you’ll have backers at every price point, consider what would be appealing for your audience.
Let’s say you are crowdfunding for a children’s book. For a small donation, you can send a digital coloring page. For other types of businesses, you could give a sticker or keychain (make it appealing rather than run-of-the-mill).
For mid-tier donors, you could give them your product before it’s released to the public, and for higher donations, you could offer a VIP experience, like a tour of your manufacturing facility and private lunch. Or for the children’s book, you could name a character in the book after major donors.
Crowdfunding success depends on you knowing your audience and what will motivate them to contribute to your successful projects.
Additional Types of Crowdfunding for Small Businesses
Reward crowdfunding is just one of many types of crowdfunding, so educate yourself on all your options if you’re considering launching crowdfunding projects. Spend time reading crowdfunding sites to understand which is the best fit for your needs.
Real estate crowdfunding pools investors together to fund real estate opportunities. There are both debt crowdfunding and equity-based crowdfunding platforms in this space; with the former, investors are paid back, and with the latter, investors receive equity in the investment.
With donation crowdfunding, donors don’t receive a perk the way they do with rewards-based crowdfunding; they simply donate funds and get nothing in return. GoFundMe.com is the major platform for donation-based crowdfunding.
And then equity crowdfunding campaigns invite private and accredited investors to support your company in exchange for a piece of ownership of your business.
Nav’s Verdict: Reward-Based Crowdfunding
Reward-based crowdfunding is a great funding option if you have a compelling product/project and know how to market it. Keep in mind that the time you will spend coming up with a successful rewards-based crowdfunding campaign for your entrepreneurial ventures is probably going to be quite a bit more than the time investment you’d spend on a loan application or investor presentation, but if you don’t qualify for other options — or would prefer to not have to pay back a loan — crowdfunding could be right for your business or startup.
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