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Reward-based crowdfunding is a great way to raise money for a project or product without taking on debt or giving up equity in your business. Instead, you’ll receive money from donations and reward your donors with custom products and experiences. Crowdfunding campaigns that perform well are typically for consumer products or projects with broad appeal. Reward-based crowdfunding is not the same as equity crowdfunding, which is more similar to traditional equity financing.
What Is Reward-Based Crowdfunding?
Reward-based crowdfunding allows you to raise donations for a project or endeavor from a large number of people, or “backers”. Traditional reward-based crowdfunding is not a form of debt financing (i.e., loan) or equity financing (i.e., venture capital). Crowdfunding isn’t an entirely new concept, as artists and publishers have been raising money this way for a long time. However, with the creation of the internet, crowdfunding moved online for broader reach.
To crowdfund a project, you will first set up a campaign with a crowdfunding platform, like Kickstarter. You will set a specific funding goal for your project to reach by a certain date. Some platforms only offer all-or-nothing funding, meaning that if you do not reach your funding goal by the deadline all money is returned to your backers. Others may offer flexible funding, which allows you to keep any money that you’ve raised. If you know you need a certain amount to make your project a reality, then all-or-nothing funding might be a better fit than flexible funding.
You’ll also need to offer specific rewards for backers, such as a copy of the product, a limited edition or an experience. For example, any backer that donates $25 to your project receives a t-shirt and any donating $100 receives a limited edition of the product offered. Typically, rewards get nicer and larger as the donation amounts go up. On many platforms, you can limit the number of rewards you’re willing to give for certain donation amounts (i.e., first 100 people to donate $25 will get a t-shirt).
Platforms will charge fees for using their services, and they will also pass on payment processing fees to you, the project owner. Most platforms will process payments by credit card, but a handful (e.g., Indiegogo, Patreon) do offer payment through PayPal in addition to credit card processing. In the table below, we list the average fees you can expect when using a crowdfunding platform.
|Platform fee||5% of funds raised|
|Payment processing fee|
In the case of all-or-nothing funding, you’ll only be charged these fees if you meet your project’s goal. For flexible funding, you’ll be charged these fees once the funding period is over.
Crowdfunding Pros and Cons
One of the great things about crowdfunding is that it is a debt- and equity-free way to raise capital. While crowdfunding is not suitable for all businesses, it can be a great way to raise money if you are planning on launching a product or creative endeavor. Some of the most popular campaigns on Kickstarter have been watches, clothing, board games, TV shows, luggage and headphones—all products and projects with mass appeal. Niche products or business products typically do not fare as well. Furthermore, crowdfunding isn’t a substitute for traditional financing needs (e.g., working capital, inventory, business acquisition).
- Debt- and equity-free way to raise capital
- Great for products, software and creative projects
- Gain brand recognition, free marketing
- No credit checks, collateral or personal guarantee required
- Good for startups that can’t access traditional capital
- Confirming your target market if your project is successful
- Getting early feedback from donors on your product/project
- Typically can’t use funds for traditional needs (i.e., working capital, business expansion)
- Bad for business-to-business (B2B) products or complex/niche products
- Difficult to raise over $100-300k
- Time spent marketing and pitching project
- Potential tax implications if donations are not used for project purposes
- Having your idea stolen or ripped-off
- Public failure if project doesn’t meet goal
There are a lot of crowdfunding websites to choose from, with many catering to specific purposes or projects. Below, we’ve listed some of the most popular websites that are well-suited for entrepreneurs and small businesses.
One of the most well-known crowdfunding websites, Kickstarter started in 2009. Kickstarter only offers all-or-nothing funding on its website, and most of the projects on Kickstarter’s website are creative projects (e.g., film, games, music, publishing, art). Fees at Kickstarter are 5% for platform fee and 3% + $0.20 for the payment processing fee. Some of the most well-funded products and projects on Kickstarter include watches, coolers, clothing, games and television shows.
Indiegogo is one of the oldest crowdfunding platforms available, having launched in January 2008. Unlike Kickstarter, Indiegogo offers both flexible and all-or-nothing funding for its projects. Fees are fairly standard with a 5% platform fee and a 3% + $0.30 credit card processing fee. If you choose to take payment through PayPal, payment processing fees range from 3% to 5%. Smartphones, beehives, software, charity projects, headphones and movies are among some of the most funded projects on Indiegogo.
Launched in 2013, Patreon operates a little differently from a traditional crowdfunding platform. Instead of making a one-time donation, backers will back an artist, musician or other creator on a recurring basis or per work of art. Creators still offer rewards to their backers. Patreon charges a 5% platform fee, plus a 2% PayPal processing fee. Popular creators on Patreon include YouTubers, bloggers, musicians and podcast creators.