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.
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.
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.
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
Key Performance Indicators
Key Performance Indicators
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.
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.
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.
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.
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.
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.
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.