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A rising force among today’s small business owners and entrepreneurs, crowdfunding can enable access to funds that may have been previously out of reach. Instead of relying on investors or financial institutions, it allows you to tap into a grassroots support system.
With rewards-based crowdfunding, entrepreneurs solicit financial donations from individuals in return for a product or service. It’s one of the most popular types of crowdfunding. Here’s why: It doesn’t require giving up any equity in your company or paying back any of the funds you raise.
While crowdfunding for a small business can be a game-changer, a successful rewards-based campaign can take a fair amount of time, hustle, and salesmanship. You typically need to develop a convincing pitch that appeals to as many people as possible and offer attractive rewards at all donation levels.
Could rewards crowdfunding be a good fit for your business? Read on to find out.
Key Points
• Rewards-based crowdfunding allows small businesses and entrepreneurs to raise money from the public in exchange for items or services.
• Campaigns are typically hosted on crowdfunding platforms, with set funding goals and deadlines, and they only pay out if targets are met.
• This approach can benefit startups and businesses bringing new products to market or those who can’t meet traditional loan requirements.
• Compelling marketing, attractive rewards tiers, and active promotion help maximize results.
• While campaigns can build brand awareness and provide early customer feedback, they can be time-consuming and may not raise much capital.
What Is Rewards-Based Crowdfunding?
With rewards crowdfunding, a company asks for money from the general public in exchange for a gift. Generally, companies provide tiers: The more money you give, the greater your reward.
To launch a rewards-based crowdfunding campaign, you generally need to describe your project or idea on a crowdfunding platform. You’ll also likely need to set a specific fundraising goal, choose an end date, and ask the crowd to contribute to your campaign for the promise of a reward.
Crowdfunding rewards can be as basic as a personalized thank-you letter or branded T-shirt. The most popular crowdfunding gifts, however, often revolve around donors gaining early access to the product because they actually receive what excited them enough to fund your project in the first place.
Rewards crowdfunding differs from other types of crowdfunding. With equity crowdfunding, for example, businesses give up a percentage of their company in exchange for funds. With debt or loan crowdfunding, companies pay back any money received with interest.
What Type of Business Is It Useful For?
Rewards-based crowdfunding can be great for startups that don’t qualify for traditional small business loans.
It can also be a good choice for any small business that wants to test the waters on a new product or idea. Should you need to tweak an aspect of your product or service, user feedback from the crowdfunding process will likely let you know quickly.
Rewards crowdfunding might not be ideal, however, if your business has a complex product or service. It may be hard to explain the value of your company in layperson’s terms to a crowdfunding audience.
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Who Can Donate to Your Crowdfunding Campaign?
Anyone can donate to a rewards-based crowdfunding campaign — family, friends, business associates, customers, or people entirely outside your network. Crowdfunding doesn’t require donors to have any special training, experience, or, in many instances, large amounts of money to donate.
Often, business owners will share their campaign on social media with the hope that their followers will share the campaign with their networks.
What Platforms Can I Use for Crowdfunding?
There are many rewards-based crowdfunding platforms that small businesses and entrepreneurs can explore. These include:
• Kickstarter
• Indiegogo
• IFundWomen
• Fundable
• Patreon
• ArtistShare
Each platform has its own rules, procedures, and fees. Platforms typically charge a percentage (which can be around 5% or even 12%) of total funds raised, plus a credit card processing fee that can run around 3% to 5% of each transaction.
In many cases, companies won’t receive their money (and donors won’t get their rewards) unless funding targets are hit before the project’s deadline.
Researching Reward Ideas for Crowdfunding
Generally, effective rewards are those that excite your target audience no matter which tier they fall into, so it can be a good idea to provide multiple reward options.
You may want to start by researching successful crowdfunding campaigns that offer products similar to yours. What sort of crowdfunding gifts did they offer? How many tiers did they provide?
Ideally, you’ll want to find something that is both affordable for you and interesting to your audience.
For example, if you have an app you want to promote, you might consider providing the following tiered rewards:
• $1: thank-you email with a special sneak peek video of the progress your team has been making
• $5: thank-you postcard and weekly emails providing updates
• $10: T-shirt and weekly emails providing updates
• $15: early access to the app
• $20: T-shirt and early access to the app
• $50: honorary mention within the app and early access
• $75: T-shirt, early access, and honorary mention
What Are the Pros and Cons of Rewards Crowdfunding?
All fundraising strategies come with a unique set of benefits and drawbacks. Here are some of the pros and cons of rewards-based crowdfunding.
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Pros:
• Not giving up any equity in your company
• Not taking on any debt (aside from the reward)
• Creating brand awareness and excitement
• No collateral required
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Cons:
• Length of time needed to launch and promote the campaign
• Difficulty in raising large amounts of money
• Potentially losing money if you do not reach your target goal
• Competitors potentially see your idea and implement it themselves if you do not protect it with a patent
Pros
One of the biggest advantages of rewards-based crowdfunding is that you’re not giving up a portion of your company, nor are you taking on any business debt. All you’re doing is offering perks to donors for giving you donations.
Unlike applying for many small-business loans, a crowdfunding campaign does not require you to pass a credit check or meet eligibility requirements.
Rewards-based crowdfunding can be a good funding option for a startup because of the exposure you can gain on the platform.
This can help establish your customer base and build brand awareness. If donors get really excited about your product, they may do a lot of your marketing for you by talking about it on social media. When this happens, not only are you generating money, but you’re also getting free advertising.
Rewards crowdfunding can also enable you to get consumer feedback during the early stages of product development to help you optimize your product.
Cons
One major drawback to running a rewards-based crowdfunding campaign is the amount of time and effort you may have to put into it.
Entrepreneurs typically need to create a persuasive campaign, which may include producing promotional videos, to get backers interested in the project. They will likely also need to continuously promote their product.
Additionally, if you don’t reach your fundraising goal, you may have to give all of the money you raised back to the donors, leaving you with no return on your efforts.
Another potential drawback to rewards crowdfunding is that it can allow competitors to see and steal your idea. Patents can protect you, but they, too, can take time and money. Unfortunately, successful crowdfunding can sometimes lead to cheap knockoffs.
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The Takeaway
Reward-based crowdfunding is a form of crowdfunding in which the creators of a new product, service, or business solicit capital from a large number of people (the “crowd”) in exchange for the promise of a reward. In many cases, the reward is the product or service that the campaign was created to fund.
Rewards crowdfunding can help you raise money — as well as generate excitement — for your product or service. However, it can take a fair amount of effort to execute a successful campaign, and you may not be able to raise as much money as you might need to launch or grow your business.
Whether you decide to try your hand at reward-based crowdfunding or not, you may want to check out other financing options as well.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Who receives the rewards in rewards-based crowdfunding?
The people (or crowd) who contribute money receive rewards in exchange for their financial support. These perks may include branded merchandise, email updates, or early access to the product or service being funded.
What is the difference between rewards-based crowdfunding and equity-based crowdfunding?
In rewards-based crowdfunding, entrepreneurs and small businesses raise money by offering perks or products without giving up company ownership. In contrast, equity-based crowdfunding involves selling shares to raise funds, giving investors a financial stake in a company.
What are the main benefits and risks of rewards-based crowdfunding?
The main benefits of rewards-based crowdfunding include raising funds without giving up equity, avoiding debt, building brand awareness, and gaining early customer feedback. The main risks include the time and effort required to run a campaign, the possibility of not meeting fundraising goals (and losing the funds raised), difficulty raising large amounts of capital, and the risk of competitors copying your idea.
Photo credit: iStock/luplupme
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