Reward Crowdfunding Explained
Reward crowdfunding is a very popular way for startups and entrepreneurs to receive the necessary capital in order to initialize the first steps of getting a business up and running. However, it is also utilized by more mature companies that want to raise capital for an idea they are passionate about and have a good reward to give to backers in return for their capital.
You will find various reward-based crowdfunding platforms online where creative minds present their ingenious business ideas with the purpose of attracting individuals who will want to invest in the project. In return, these individuals will be offered a product or a service as a ‘thank you’ for their investment.
This article will:
- Give you a definition of reward-based crowdfunding
- Explain the functionality of reward-based crowdfunding platforms
- Provide 5 creative ideas for crowdfunding rewards
- Introduce 4 reward-based crowdfunding platforms (other than Kickstarter)
Definition of Reward Crowdfunding
Reward crowdfunding is when individuals contribute a certain amount of money to a given project or various projects. In return, these individuals expect to gain some kind of reward. The exact size of the reward usually depends on the amount of money that an individual has pledged in a project.
The European Commission defines reward-based crowdfunding as a crowdfunding form that consists of:
“(…) individuals donating to a project or business with the expectation of receiving a non-financial reward in return, such as goods or services at a later stage.”
To sum up, reward-based crowdfunding is a way for businesses to raise money for specific projects through investments made by individuals, whose contributions will be rewarded non-financially, e.g. by receiving products or services from the business in which they have invested.
Reward-based crowdfunding is one of the four main crowdfunding business models. The other crowdfunding types are donation crowdfunding, equity crowdfunding and debt crowdfunding/peer-to-peer lending.
How Does Reward-based Crowdfunding Platforms Work?
There are several reward-based crowdfunding platforms out there that offer a way for startups and entrepreneurs as well as small and medium-sized businesses to receive the necessary funding to launch a new project, start working on a new idea or in some other way expand their business.
Most of these reward crowdfunding sites work towards the same goal:
To connect projects with individuals who care and possess a genuine interest in the given project in order to enable creativity and innovation to flourish.
Reward-based crowdfunding platforms work more or less the same way as regular crowdlending platforms except that reward crowdfunding does not result in a financial reward as is the case with many other crowdfunding types such as peer-to-peer lending.
When entering a platform from an investor’s point of view, you will be presented with an overview of different projects that are available for investment. Some platforms, like Kickstarter for example, have a large number of projects that you can choose from. In these cases, it is very helpful when the platform offers filtering options to narrow down your search to the most relevant projects.
It might be, for instance, that you are solely interested in investing in projects within the field of art, fashion or games, or that you want to support projects that are located nearby you. Having narrowed down your search to only show projects that are relevant to you, you can browse through the presented investment options and read more about the available projects.
If you decide to invest in a project that you like, you need to also figure out the amount of money you want to pledge. This might depend on the type of rewards offered by the creator of the project. For instance, the reward offered for pledges that are superior to €50 or even €100 might be more interesting compared to the reward offered for a pledge of €20.
What Are Crowdfunding Rewards?
Crowdfunding rewards are what potential investors gain from investing in a specific reward-based crowdfunding project. The rewards are of non-financial character meaning that investors won’t be rewarded with money but instead with products or services.
If you are investing in the publication of a book, your reward might be a sample of this book before it gets published, or if you are investing in the opening of a new restaurant, your reward could be a free dinner for two in that restaurant when it opens.
Obviously, rewards need to be of good value for money, thus, the size of the reward will have to match the amount of money pledged in order to motivate individuals to invest more money in a given project.
In case of the above-mentioned examples, you might get rewarded a larger number of signed books or a special edition, if you pledge more money, and in the case of the restaurant, the dinner might not be limited to two people, but enable you to invite your entire family.
5 Creative Ideas for Crowdfunding Rewards
Rewards play a significant role in motivating pledgers, i.e. individuals who invest in projects, to invest more money in your business and, in general, cause excitement around your business idea and/or project. Therefore, rewards should be well thought through.
Here, you will be presented with a list of some ideas for crowdfunding rewards that you can use to generate bigger amounts of money pledged into your project:
- A ‘thank you’ card: If your business does not have the possibility of offering attractive rewards, a nicely put ‘thank you’ card might do the trick.
- Tickets to events: When your project involves some kind of an event, an idea could be rewarding potential investors with tickets for that event.
- Exclusive ‘behind the scenes’ experiences: For film productions, it can be a great motivational factor to offer ‘behind the scenes’ experiences exclusively for investors.
- Special editions: Creators of projects related to publishing for instance books, fashion or music could consider rewarding investors with special editions of your work.
- Masterclasses: If your project relates to art such as painting or craftwork, you might want to consider rewarding investors with invitations to masterclasses within your specific area of expertise.
These are just some ideas that project creators can make use of or not. The most important, however, is that the thing or service that you are promoting as your reward is not available anywhere else. In other words, it must be unique to really attract a high amount of pledges.
Another trick that is good to keep up your sleeve is creating limited rewards that are only available for the first 100 investors. This trick has proven especially effective since people seem to want products that are only available in a limited number more than usually.
What Are Other Sites Like Kickstarter?
If you are already familiar with the world of reward-based crowdfunding, you have probably also heard about the popular reward-based crowdfunding site Kickstarter, a platform that has helped more than 150.000 projects raise funding.
However popular Kickstarter has grown, this platform is not the only one of its kind.
Other sites like Kickstarter are:
Crowdfunder: Crowdfunder is UK’s biggest crowdfunding platform and does not only specialise in reward-based crowdfunding; they also canalise energy to donations, community shares and equity lending.
Indiegogo: Indiegogo specialises in live crowdfunding campaigns for unconventional and groundbreaking products within the field of innovation, technology and design.
Fundable: Fundable is an American reward-based crowdfunding platform that exclusively focuses on helping entrepreneurs and companies raise capital from investors, customers and friends.
Patreon: Patreon is mainly for artists and creative spirits who want to build better relationships with their fans by rewarding their support with benefits like insight into the creative processes or exclusive content.