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What is Reward-Based Crowdfunding?
Reward-based crowdfunding is a type of crowdfunding where you - the creators of a new product, service, or business - solicit a large number of people to contribute to your “campaign” in exchange for something in return (think Kickstarter & Indiegogo).
Backers of a campaign are promised a reward for contributing to your project. These rewards often include the product or service that the campaign was created to fund, and/or may also include promotional items like branded t-shirts, bumper stickers, bobbleheads, and more.
In cases where the rewards are focused around the product or service that the campaign was created to fund, reward-based crowdfunding serves as a platform for you (the creators) to pre-sell your product, service, or creative work.
Crowdfunding raises startup capital while also allowing startups to:
- Gain exposure
- Build awareness
- Validate your ideas
- Pre-sell your products, services, or creative works
Furthermore, unlike many other types of new venture capital, reward-based crowdfunding does not require startups to incur additional debt or to give up ownership or equity in their venture.
On the other hand, although reward-based crowdfunding may provide many advantages, campaigns must still deliver rewards to their backers, often at significant expense.
How Does Rewards-Based Crowdfunding Work?
In reward-based crowdfunding, the creators of a product, service, or business organize a campaign on a crowdfunding platform where they describe their product, service, or idea. They set a goal, choose an end date, and ask the crowd to contribute to their campaign in exchange for the promise of a reward. The reward systems for this type of crowdfunding are often tiered, with the principal rewards being the product or service that the campaign was created to fund. For example, a board game designer might offer a branded bumper sticker to anyone who contributes $10 to their campaign and offer the game they are designing as a reward to anyone who contributes at least $50.
What Types of Products and Services Do Reward Crowdfunders Support?
There are a number of types of products and services that crowdfund well in reward-based crowdfunding.
Creative Works: Creative works - arts, music, film, and publishing - comprise a large number of and see the highest success rate amongst crowdfunding campaigns.
Games: including card games, board games, and video games - is another category that has seen a high number of successfully funded projects and has raised large amounts of money. Among the categories on Kickstarter, one of the most popular reward-based crowdfunding platforms, Games has raised the most to date on that platform.
Technology: Technology projects are another type of project that crowdfund well. In fact, 3 of the top 5 highest funded crowdfunding projects have been technology projects that each raised over $10M each.
Historically, other projects that have crowdfunded well in reward-based crowdfunding include Design, Fashion, and Food and Drink.
Rewards-Based Crowdfunding Platforms
There are a number of reward-based crowdfunding platforms to choose from. To help you narrow down the right platform for you, here is an overview of four of the top reward-based crowdfunding platforms.
Kickstarter is one of the largest and most popular crowdfunding platforms. As a reward-based crowdfunding platform, Kickstarter focuses on creative and tech projects aimed at creating something that can be shared as a reward.
Kickstarter campaigns are all-or-nothing. If the campaign reaches its goal, you will receive the pledged funds (minus fees) and will be expected to deliver the promised rewards. If the campaign does not reach its goal, you will not receive any of the pledged funds and your backers will receive their contributions back.
Kickstarter projects must be new and original. You are not permitted to launch Kickstarter campaigns to sell or resell things that already exist or that were not produced or designed by the campaign creators.
There are also some additional restrictions on what you can offer as a reward on Kickstarter. For instance, energy drinks, alcohol, and weapons (and replicas of weapons) are all prohibited on the platform.
Platform Fee: 5%
Processing Fee: 3-5%
Indiegogo is another extremely large and popular reward-based crowdfunding platform with project categories focused around tech and innovation, creative works, and community projects.
Although primarily a reward-based crowdfunding platform, Indiegogo also allows community projects and the solicitation of donation-based crowdfunding where no reward is offered.
Indiegogo offers two types of campaigns on their platform: Fixed Funding and Flexible Funding. Fixed Funding is an all-or-nothing campaign where you must meet your goal to receive funding. Flexible Funding is more lenient, allowing you to keep the pledges you have received whether you have met your goal or not.
There are some restrictions on what you can offer as rewards on Indiegogo. For instance, alcohol, weapons, and any smoking related products are specifically prohibited.
Platform Fee: 5%
Processing Fee: 2.9% + $0.30 for each transaction
Patreon is a crowdfunding platform focused on those that create content. With more than 200,000 creators and millions of backers, Patreon is favored among artists, musicians, and digital creatives - bloggers, podcasters, and v-loggers.
Patreon is unique from many crowdfunding platforms as it allows creators to crowdfund via a subscription model, where backers and fans contribute a specific amount of money regularly (either monthly or per creation).
Because Patreon campaigns are based on ongoing content creation, there are deadlines to the campaigns. However, because your supporters can cancel at any time, they will expect you to produce content regularly or else are likely to cancel their subscription to your campaign.
Platform Fee: 5-12% (depending on plan)
Processing Fee: 2.9% + $0.30 for each transaction
ArtistShare is one of the many niche crowdfunding sites that cater to a specific niche- in this case musicians. ArtistShare is one of the oldest crowdfunding websites, before anyone really knew what crowdfunding was.
ArtistShare allows musicians to pitch their ideas to their audience to gauge interest in potential works and fund their projects.
ArtistShare has turned into a business model for many musicians, and numerous ArtistShare projects have received Grammy nominations and awards.
As opposed to platform and processing fees, ArtistShare charges a 15% royalty fee to creators who utilize their platform.
Royalty Fee: 15%
Pros and Cons of Reward-Based Crowdfunding
There are several pros and cons of reward-based crowdfunding.
What are the advantages?
- Allows you to raise capital without having to pay it back or give up equity.
- Allows you to validate your idea and gather feedback.
- Allows you to pre-sell your product or creative work, potentially funding the project before it is even created.
So, what are the disadvantages?
- If you do not reach your goal, you may not receive the pledged funds.
- Most appropriate for B2C (business to consumer) products and creative works.
- A significant portion of the proceeds may be required to produce and deliver rewards.