Revenue-Based Finance (RBF) is a type of capital provided to growing businesses in which investors give funds in return for a pre-determined percentage of ongoing gross revenues. Repayments are due until the principal and a predetermined multiple of revenue are paid back.
Rewards-Based Crowdfunding
Reward-Based Crowdfunding is a way of raising money to finance projects and businesses based on the promise of a predefined reward for the project donor. Project creators can utilize rewards-based crowdfunding platforms or organize their own funding efforts directly to their community of supporters.
Rewards-based crowdfunding is for projects and creators
Crowd-funders are promised a type of rewards, such as access to the creative process, access to the creator, an early-stage product, or an artifact or experience related to the creation of a project. Projects can take the form of art, music, film, books, products, not-for-profit programs, activist efforts, exclusive access to a creator, or any type of making or performing that may or may not involve a formal organizational structure. Project fund recipients do not grant any ownership of the work to funders, nor do they owe any financial return. Crowd-funders give because they want to see a project come to life, or because they want to support a particular project creator.
Rewards-based crowdfunding vs. equity crowdfunding
Equity crowdfunding involves similar mechanisms to rewards-based crowdfunding, but the capital raised involves the sale of securities in a private company, in the form of shares, convertible notes, debt, or revenue.
When companies use rewards-based crowdfunding, they do not give up any ownership and the capital is therefore considered “non-dilutive,” meaning that creators with companies do not give up any ownership to providers of this type of finance.
Equity-based crowdfunding is dilutive, but typically in small increments of many equity holders with small amounts, sometimes as small as $500 or $1000. In the US, for angel and venture investing, investors need to be accredited, meaning they have to make at least $200,000 a year or have a net worth of $1 MM (minus real estate holdings). But Equity Crowdfund investors can invest without meeting these requirements.
Rewards-Based Crowdfunding can also be used by not-for-profit organizations in certain geographies and on certain platforms, but typically have to register as officially chartered 501(c)3 organizations.
Example Crowdfunding Platforms
Crowdfunder | Indiegogo | Kickstarter | Patreon | Pozible
Is Rewards-Based Crowdfunding the right capital for your business at this stage?
COMPANY PERSPECTIVE
Benefits
- Non-dilutive capital
- Tests viability for earliest adopters
- Permits room for failure
Challenges
- Crowdfunding campaigns are time-consuming
- You need to have already built a network of supporters and backers to be successful
- Crowdfunding platforms require you to market and build a community of backers
Key Performance Indicators
- Percent of project funding goal met
CROWDFUNDER PERSPECTIVE
Benefits
- Social proof: makes crowdfunding feel good to back creators, and then show it off on social media
- Access to early-stage creators, art, media, and products
- Direct giving
Challenges
- Fraud occurs in crowdfunding platforms where projects have failed to materialize to deliver the promised rewards
- Very long lead times and often missed deadlines are common in crowdfunding project
- Crowdfunding is not tax-exempt except in special situations with non-profit organizations
Key Performance Indicators
- Time to complete project
- Project time overruns
When it Works Well
Company has a community
Companies often overestimate the strength of their email list and underestimate how many early potential customers are actually project backers. Those that do well actively cultivate a customer community who respond well to any offer of engagement with the product, service, company, or founding team.
Early adopters value project
While many potential customers might say that they want the product or other artifact created with project funding, not all follow through to back the project.
Companies that test project funding pricing and understand the value being created for each type of reward tend to do better in the overall process.
Company has time for campaign
Project creators also overestimate the time involved in running a successful project funding campaign. Creators often have to be ready to put aside the day-to-day management of company building in order to get their project funded.
Those project creators using Rewards-Based Crowdfunding to finance early-stage product development may seek support from for-hire crowdfunding experts.
Challenges to Rewards-Based Crowdfunding
Lack of transparency
Within crowdfunding platforms like Indiegogo or Kickstarter, some projects receive special placement or promotion.
The criteria used to determine which projects receive platform promotion is unclear and the lack of transparency may create opportunities for fraudulent projects.
Occasional fraud
As mentioned, there have been a number of fraudulent projects on crowdfunding platforms when a project creator fails to deliver promised rewards or when money is misused.
Creators are engaged in a contract with project backers and may be unaware of potential legal consequences for failure to deliver promised rewards.
Failed or late projects
A University of Pennsylvania study of Kickstarter found that 9 percent of projects did not deliver rewards, and 8 percent went to failed projects.
Most creators struggle to estimate the time required to deliver the promised rewards – 65 percent failed to meet their deadline.
Trends in Rewards-Based Crowdfunding
Ownership > rewards
The demand for new types of equity, debt, and real estate crowdfunding platforms is accelerating with shifting legislation. The JOBS Act which legalized fundraising in exchange for equity ownership finally permitted “nonaccredited investors” – investors who do not make over $200,000 per year or who do not have $1 MM in liquid investments.
With the rise of equity crowdfunding, in particular, company owners may prefer to raise more substantial amounts of capital vs. the smaller project funding amounts typical on Rewards-Based Crowdfunding platforms.
Direct crowdfunding
Some makers, creators, artists, and company builders find they can directly raise project capital directly through pre-sales or other mechanisms, bypassing platforms that charge a share of the total amount raised.
Niche crowdfunding
Crowdfunding platforms are being developed to focus on specific creators or company builders, such as Real Estate crowdfunding platforms, or a fundraising platform for TikTok creators.
Before You Consider Rewards-Based Crowdfunding
- Do you have a large and engaged network who will show up to cover your project budget minimum?
- Do you have the time to manage a successful campaign (or funds to hire a vetted expert)?
- Are you certain about the timeline?
Exploring Rewards-Based Crowdfunding
- Take a look at Kickstarter, Indiegogo, and Patreon to see the different types of projects and creators across these leading platforms
- Fund a project – follow updates as the project is brought to life
- Compare the time investment for running a Crowdfunding campaign vs. fundraising other types of capital
- Plan out your funding and capitalization strategy to figure out if Rewards-Based Crowdfunding might be right for you.
Discover Alternative Capital
Rewards-Based Crowdfunding is one way to grow your company, and you can choose other capital types as an alternative or pair and combine at different stages of your business. Consider these alternative capital sources or explore our Capital Library.
