Pros and Cons of Rewards-Based Crowdfunding
Sites like Kickstarter and Indiegogo are called rewards-based crowdfunding platforms because companies or people who fundraise on them provide incentives to donors who donate their money to worthy projects or companies. For example, if you’re developing a new type of tent, you’ll offer your donors various incentives based on how much they donate. If a donor gives $50, they’ll get early access to purchase the tent, along with an insulated mug. If a donor gives $350, they’ll get a tent when the product launches.
Pros of Rewards-Based Crowdfunding Explained
Access to “cheap money”: Using rewards-based crowdfunding, you’re raising money for your project or business without selling off an equity stake in your business. These are donations. Also, you get tens, hundreds, or even thousands of people committed to the success of your campaign—that can be really valuable. Pre-funding your next product: This type of crowdfunding is a great way to lay the groundwork for your next innovative project. You’ve already built a network of engaged, enthusiastic supporters who have gained through supporting your work, and they may be eager to get involved next time as well.
Cons of Rewards-Based Crowdfunding Explained
Pressure: Once you’ve successfully raised money, you’ve got to ship whatever you’re producing. The clock is ticking, and shipping late (or not at all) could be a public relations and social media disaster for your company. Potentially a lot of work with little payoff: Because of the binary nature of some crowdfunding campaigns (if you don’t hit your target, you get nothing), you can wind up spending a lot of time and energy running a campaign that ultimately fails because donations did not break the threshold you set.
Pros and Cons of Equity Crowdfunding
Rewards-based crowdfunding campaigns accept donations in exchange for rewards. It gives average people the satisfaction of helping you achieve your goals. Equity crowdfunding, on the other hand, is when you solicit investors who give you capital in exchange for equity in your company. For example, you launch an equity campaign. An investor says she’ll give you $100,000 in exchange for 20% of your company. This type of crowdfunding is also known as “angel investing.”
Pros of Equity Crowdfunding Explained
It’s smart money: By taking angel investing (individuals investing in startups) online, equity crowdfunding has opened up this type of investing to more and more people. There are very accomplished investors using these platforms whose contribution may add to the success of your business long term. There are potentially larger sums of fundraising: Venture capitalists that browse equity crowdfunding platforms often have millions of dollars to invest in companies. Rewards-based crowdfunding platforms tend to have much smaller donations. For example, in August 2022, Kickstarter’s average donation was around $318. Easier investor relations: Managing numerous investors in your company becomes a very time-consuming job. Instead of raising money from numerous investors, some equity crowdfunding platforms pool the funds they raise into a single investment, making one point of contact for reporting requirements.
Cons of Equity Crowdfunding Explained
Increased transparency: Not all entrepreneurs are comfortable posting their financials and business plans online for investors to see. Getting comfortable with equity crowdfunding means you must get comfortable with more transparency.“Expensive” fundraising: Why give away a piece of your company if you could receive donations to build your next killer product? It’s a strong question and one that entrepreneurs must see an answer to. Giving away a piece of your business’ pie is only worth it if you’re getting something valuable in return (like the participation of experienced investors in your industry, for example).
How to Set Up a Successful Crowdfunding Campaign
Crowdfunding sounds easy: Post your funding needs up on a website, offer some small rewards, and you’re on your way to a successful fundraising effort. Of course, it’s not that easy. Getting hundreds—or thousands—of people to donate to your project requires the same attention, planning, and execution as any successful marketing or fundraising campaign. Here are some tips for launching a crowdfunding campaign on a platform like Kickstarter or Indiegogo:
