Rewards-based crowdfunding

Following my previous post in which we discussed the definition, history and types of crowdfunding, let’s dig a bit deeper into perhaps the most common variant: the rewards-based crowdfunding.

Rewards-based crowdfunding: definition

Rewards-based crowdfunding offers a product or service in return for the money pledged to the project.

Show me a video explaining rewards-based crowdfunding!

For the more visually inclined, here’s a video of me explaining the basics of rewards-based crowdfunding with some new examples:

Benefits of running a rewards-based crowdfunding campaign

Running a crowdfunding campaign, even if it’s not successful, has a lot of benefits. Let’s take a look at the main ones:

• The most obvious one, raising the funds that you need to bring your idea to life. However, I would argue this is not the easiest way to do so. If the money is the only thing you’re after, crowdfunding might not be the best path…
• It’s a great way to validate your idea: if you don’t generate enough traction, it might mean that there is not enough demand to build a business around it. It’s a great way to ‘fail fast’, as all the lean startup gurus recommend.
• Building awareness of your brand: a crowdfunding campaign is, after all, a marketing campaign on steroids. If you’ve done your job well, the reach of this campaign will build awareness in audiences that won’t have heard of your product before.
• Creating an army of advocates: people that back your project will feel part of your journey and will, no doubt, talk to their friends and family about the project they’re supported. Win!
• Preparing for an equity-based crowdfunding campaign: the awareness and advocacy discussed in the previous two points, together with a validated idea by the crowd, can get you ready for an equity raise down the line. There are plenty of examples of companies that have used rewards-based campaigns as a springboard for an equity raise, such as eFoldi.

Platforms

Usually, rewards-based crowdfunding campaigns are run through a platform that, in exchange for their bespoke tools, will charge the successful projects a fee. This fee is usually 5% of the funds raised for the platform plus a payment fee up to 3% (usually Stripe). You should take into account these fees when planning your campaign! There are countless platforms, here are the most popular ones:

Kickstarter: it’s the biggest and perhaps most known platform. Based in the US, they launched in 2009 and they have raised, at the time of writing, over $3.67 bn. It’s a very ‘pure’ platform, only allowing ‘all-or-nothing’ campaigns. The success rate, defined as the number of projects funded divided by the number of projects launched, is of 36.11%.

Cultural categories (‘Music’ and ‘Film & Video’) are the ones that have completed most successful raises. However, ‘Games’ is the one that has the biggest number of campaigns raising over $1m, followed closely by ‘Technology’. If you are like me and like stats, they have quite a comprehensive page with real-time open metrics.

Indiegogo: the second biggest platform is slightly more opaque with their stats, but an article at Fast Company quoted $1.5bn raised since their launch in 2008. Unlike Kickstarter, Indiegogo allows to keep the money you raise (what they call ‘Flexible funding’). Therefore, the success rate is not comparable.

Indiegogo has diversified its business by launching an online store called Indiegogo Product Marketplace. As Kickstarter has strategically moved away from being an eCommerce, some projects funded on that platform have migrated to Indiegogo Product Marketplace. An example is Voyage Pillow.

Crowdfunder.co.uk: the reference platform in the UK, it has raised over £40m since its launch in 2014. With a big community of over 600,000 members, it has a social and community focus. Partnering up with companies such as Santander, Virgin and multiple local councils, they have multiple plans to match-fund the money raised in a project. For example, a project I run with The Merstham Mix received £10,000 from the Santander Changemaker fund. It allows both ‘all-or-nothing’ and ‘keep what you raise’ projects.

Patreon: this platform is designed around recurrent donations that allows content creators to monetise their videos, blog articles, music and even software developments. Launched in 2013, it has become the reference in the sector. A quick look at Graphteon, a site that tracks the performance of the campaigns in the platform, showcases how powerful this form of crowdfunding can be. Many creators are making a full time living thanks to it!

Types of products and services that crowdfund well

There are many types of products and services that crowdfund well. Many people have in mind bands funding tours (Marillion) and records (like Amanda Palmer, who raised over $1m before having recorded anything!) through crowdfunding. But also many other categories do well:

• Technological products such as TicPods are raising at the time of writing over $1.6 m and counting
• Leisure products such as the Coolest Cooler
• Food and drink, such as the campaign I ran for Crumbs Brewing
• Community, again one of my campaigns, The Merstham Mix

What is the common thread? All these campaigns are addressing a problem in an innovative way. ‘How’ they’re doing it is more important than ‘what’.

Types of rewards

Based on his incredible experience, my friend Valentí Acconcia has distilled the 20 golden rules of crowdfunding, that I have translated into English. A few of them relate to rewards and that if applied correctly produce the best results for a crowdfunding campaign. Here they are:

• The rewards should be generous, tangible and abundant
• Ideally, they will also be exclusive, limited and valuable
• They should be appealing to a group big enough that will guarantee the success of the campaign

Legal and Taxes

It’s important to note that,  rewards-based crowdfunding campaigns are considered ‘online sales’ both from a legal point of view and in the eyes of the taxman. Therefore they are, in the UK, subject to VAT and corporate tax. Depending on the legal structure of the company raising funds, this will have different implications, so talk to an expert to avoid getting caught on the backfoot!

Conclusion

• Rewards-based crowdfunding has many benefits on top of just raising funds
• The projects are usually run through a platform. There’s many to choose from and we’ve seen the main ones
• Many types of products and services crowdfund well and they have in common that tackle an issue in an innovative way
• Rewards-based crowdfunding campaigns are considered a form of online sales and they are subject to their laws and taxation

Want to know more?

If you want to dig deeper, in this article, I discuss 3 keys for a successful rewards-based crowdfunding campaign.

And please throw my way any questions you might have about crowdfunding by commenting on the article or through my contact form.