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 (also known as seed-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.
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, companies give up a percentage of their company in exchange for funds. With loan crowdfunding, any money received is paid back 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 a service or an aspect of your product need to be tweaked, user feedback from the crowdfunding process will likely quickly let you know.
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.
Recommended: Crowdfunding Loans Explained
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 reward-based crowdfunding platforms 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 10%) 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, the best rewards will excite your target audience no matter what 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 them.
For example, if you have an app you want to promote, you might consider providing the following 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 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.
| Pros | Cons |
|---|---|
| Not giving up any equity in your company | Launching and promoting the campaign can be time-consuming |
| Not taking any on any debt (aside from the reward) | Can be difficult to raise large amounts of money |
| Creating brand awareness and excitement | Money raised could be lost if you do not reach your target goal |
| No collateral is needed | Competitors may see your idea and start implementing it themselves if you do not protect it with a patent |
Pros
One of the biggest advantages of rewards-based crowdfunding is that you are not giving up a portion of your company, nor are you taking on any 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 make it as good as it can be.
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, in order to help get backers interested in the project. They will likely also need to continuously promote their product.
If you don’t reach your fundraising goal, all of the money you raised may be given 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 crowdfunds can sometimes lead to cheap knockoffs.
Recommended: How to Finance Equipment With Bad Credit
The Takeaway
Rewards-based crowdfunding is a form of crowdfunding where 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, these rewards are 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 rewards-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.
Photo credit: iStock/luplupme
SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SOSB-Q224-1874360-V1