Reward-based crowdfunding is a method of raising funds for a project or venture by collecting small contributions from a large number of people. Unlike equity crowdfunding, investors in reward-based crowdfunding do not receive ownership shares. Instead, they receive products, services, or other rewards as compensation for their contributions.
Historical Context
Crowdfunding as a concept can be traced back to 1997 when fans of the British rock band Marillion raised $60,000 through online donations to fund the band’s US tour. However, the formalization of reward-based crowdfunding emerged in the mid-2000s with platforms like Kickstarter and Indiegogo leading the way.
Types/Categories of Reward-based Crowdfunding
Reward-based crowdfunding can be categorized into several types based on the nature of the rewards offered:
- Pre-orders: Contributors receive a product before it is available to the general public.
- Limited Editions: Contributors receive exclusive items not available elsewhere.
- Experiences: Contributors gain access to unique experiences, such as behind-the-scenes tours or meet-and-greets.
- Recognition: Contributors are publicly acknowledged, often in project-related materials.
Key Events
- 2009: Kickstarter is launched, becoming one of the most popular platforms for reward-based crowdfunding.
- 2010: Pebble Time becomes the most funded Kickstarter campaign, raising over $20 million.
- 2012: Indiegogo introduces flexible funding options, allowing campaigners to keep funds even if they do not meet their goal.
- 2020: COVID-19 pandemic sees a rise in crowdfunding campaigns for creative projects and small businesses struggling due to lockdowns.
Detailed Explanations
Reward-based crowdfunding allows entrepreneurs and creators to gauge market interest and secure funding without giving up equity. The success of a campaign largely depends on the following factors:
- Campaign Presentation: High-quality videos, clear descriptions, and transparent goals are essential.
- Marketing: Effective use of social media and email campaigns to attract backers.
- Engagement: Regular updates and interaction with backers build trust and credibility.
Charts and Diagrams (in Hugo-compatible Mermaid format)
graph TD;
A[Start a Campaign] --> B[Define Rewards];
B --> C[Create Campaign Page];
C --> D[Launch Campaign];
D --> E[Promote Campaign];
E --> F[Receive Funding];
F --> G[Deliver Rewards];
Importance and Applicability
Reward-based crowdfunding is crucial for startups and creative projects that lack access to traditional funding sources. It is particularly beneficial for:
- Innovative Products: Testing market viability without large upfront costs.
- Creative Ventures: Funding artistic projects such as films, music, and books.
- Small Businesses: Raising awareness and capital simultaneously.
Examples
- Oculus Rift: Raised nearly $2.5 million on Kickstarter before being acquired by Facebook.
- Exploding Kittens: A card game that raised $8.78 million from over 219,000 backers.
Considerations
- Fulfillment Challenges: Fulfilling rewards can be logistically complex and expensive.
- Intellectual Property Risks: Ideas may be copied if not adequately protected.
- Market Perception: Campaigns that fail to deliver can damage reputation and credibility.
Related Terms with Definitions
- Equity Crowdfunding: Funding where investors receive ownership shares.
- Peer-to-peer Lending: Loan-based crowdfunding where lenders receive interest payments.
- Donation-based Crowdfunding: Fundraising with no financial return to contributors.
Comparisons
| Aspect | Reward-based Crowdfunding | Equity Crowdfunding |
|---|---|---|
| Return to Backers | Products/Services | Ownership shares |
| Investor Involvement | Low | High |
| Regulatory Oversight | Minimal | Significant |
Interesting Facts
- Exploding Kittens holds the record for the most backers in Kickstarter history.
- Crowdfunding campaigns with videos are 85% more likely to succeed.
Inspirational Stories
- Pebble Watch: Started as a small Kickstarter campaign, it became a multimillion-dollar company showcasing the power of crowdfunding.
Famous Quotes
“The best way to predict the future is to create it.” - Peter Drucker
Proverbs and Clichés
- “Many hands make light work.”
- “From little acorns, mighty oaks grow.”
Expressions, Jargon, and Slang
- Backer: A person who funds a crowdfunding project.
- Stretch Goal: Additional funding targets that unlock more rewards.
- Campaign: The active period during which funds are raised.
FAQs
Q: What happens if a reward-based crowdfunding campaign doesn’t reach its goal? A: On platforms like Kickstarter, the campaign receives no funds if the goal is not met. On Indiegogo, there are flexible funding options.
Q: Are contributions to reward-based crowdfunding campaigns tax-deductible? A: Generally, no, as contributors receive a tangible reward in return.
References
- Belleflamme, P., Lambert, T., & Schwienbacher, A. (2014). Crowdfunding: Tapping the right crowd. Journal of Business Venturing, 29(5), 585-609.
- Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of Business Venturing, 29(1), 1-16.
Final Summary
Reward-based crowdfunding has revolutionized the way entrepreneurs and creators bring their ideas to life. By offering tangible rewards in exchange for financial support, it allows project initiators to validate their concepts, build a community, and secure the necessary funds to launch their ventures. Despite its challenges, reward-based crowdfunding remains a powerful tool for innovation and creative expression.
