Rewards-Based Crowdfunding: What It Is, When It Works

Rewards-based crowdfunding is a financing option for startups that depends a lot on your ability to pitch an idea.

Jackie ZimmermannOctober 27, 2020
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Crowdfunding is an alternative to traditional small-business financing that provides the means to transform a promising idea into profitable reality — without having to pay back a penny. Rewards-based crowdfunding is the most popular type of crowdfunding.

What is rewards-based crowdfunding?

Rewards-based, or seed, crowdfunding is a type of small-business financing in which entrepreneurs solicit financial donations from individuals in return for a product or service. There are about 19 times as many rewards campaigns as there are for its closely related counterpart, equity-based crowdfunding.

How does it work?

Business owners describe their project or business idea and fundraising goal on a crowdfunding platform. In return for donations, businesses provide rewards. For example, a jewelry designer might reward everyone who contributes $100 with an original handmade bracelet, or an inventor of solar-powered lawn mowers might give a mower to contributors at the $1,000 level.

Rewards don’t have to be substantial; some businesses offer a simple handwritten thank-you note.

Who is it good for?

This type of financing is geared toward startups, particularly in creative fields, that don’t qualify for traditional small-business loans but have compelling projects or want to test a market. Small businesses with a complex product or service might want to explore traditional funding options; it might be hard to explain the value of your company in layman’s terms to a crowdfunding audience.

Who can contribute?

Anyone — family, friends, customers, business partners — can contribute to a rewards crowdfunding campaign. Individual donations are often small, so business owners need to persuade as many people as possible to pitch in. Often, the campaign is shared on social media with the hope that the business owner’s followers will, in turn, share the campaign with their networks.

Is it free?

Platforms typically charge a percentage that can be as low as 5% to as high as 13% of funds raised, and may charge an additional processing fee.

Rewards-based crowdfunding pros and cons

Rewards crowdfunding allows small businesses to get new ideas off the ground without the burden of repaying a loan. Before jumping in, consider the pros and cons.

Pros

  • It’s one of the cheapest ways to raise capital.

  • No collateral, credit check or previous business experience is needed.

  • The process is simple and doesn’t require professional financial or legal help.

  • You retain all equity and control in your company.

  • Exposure gained on the platform can help establish a customer base and brand awareness.

Cons

  • Since you’re relying on individual donations, rewards crowdfunding isn’t the best option for businesses seeking large amounts of funding.

  • If you don’t reach your goal, you may have to forfeit any amount raised.

  • Pitching your idea online exposes it to potential donors — and to competitors. To avoid having your idea stolen, protect yourself with patents.

How to get started

To start a reward crowdfunding campaign, apply on a crowdfunding platform. The most popular platforms are:

You’ll need a convincing pitch that appeals to as many people as possible, as well as attractive rewards at all donation levels. An entertaining, informative video can help sell your idea. For the broadest exposure, reach out to family, friends and associates via email and social media.