Reward-based Crowdfunding
Reward-based crowdfunding is a type of crowdfunding where backers donate money to help fund a project. They do not receive a monetary return on their investment, but instead receive "rewards" if the campaign’s goal is met.
Let’s take a quick look at crowdfunding before we get into the details.
What is Crowdfunding?
Crowdfunding is an online fundraising in which people pool in their money to help launch a business. Funds are raised for multiple purposes, like startups, charities, and medical causes. Crowdfunding has also supplanted traditional finance in areas such as real estate and student debt repayment. Crowdfunding provides small companies with opportunity to raise funds for their project. However, it has both risks and benefits, which you may read about here.
There are four primary types of crowdfunding:
- Reward-based crowdfunding
- Donation-based crowdfunding
- Equity-based crowdfunding
- Debt-based crowdfunding/ peer-to-peer (p2p) lending
Reward-based Crowdfunding
As mentioned previously, reward-based crowdfunding entails soliciting funds from different investors in exchange for a "reward." It is one of the legal ways to crowdfund online for your project in India. Reward-based crowdfunding is typically oriented towards startups and multimedia ventures, and is especially well-suited for small and medium enterprises. It is also open to all types of investors, regardless of their financial background. As a result, people can contribute as little as INR 100 to a campaign.
How do reward-based crowdfunding platforms work?
Reward-based crowdfunding platforms cater to specific fields. Kickstarter, for example, is geared toward multimedia projects. However, FundingX, an Indian crowdfunding platform, is best suited for startups dealing with technology and domestic appliances, among other things.
Before registering to your preferred website, you must first brainstorm a good idea. Keep in mind that investors are looking for unique ideas to invest into. There is also a small registration fee to pay. In most cases, you'll be asked to choose a plan after registration. "Plans" are commission charged on your funds at the end of a successful campaign. It can range anywhere from 4%-12%. Some companies like FundingX also verify the startups.
Campaigns necessitate not only setting up a monetary goal, but also a time frame within which to achieve it. The time set is short, and ranges from a few months to a year at most. Additionally, you are expected to share the prototype and relevant details, as well as interact with the investors. To successfully acquire finances, you must also sell and promote your product aggressively. Backers receive the "rewards" in the months following a successful campaign, while campaigners receive the funds needed to complete their project.
What are “rewards”?
The term "rewards" refers to perks or incentives given to investors in exchange for the funding. You do not have to repay your backers, unlike traditional investments. Rewards can be either pre-orders, services like a home-cooked meal, or something more tangible. Overall, they are proportionate to the donation amount. Most campaigners also use a tier-based reward structure, in which the more money you invest, the better rewards you get. Concert tickets and CDs are excellent examples of rewards.
Pros of Reward-based crowdfunding
- There is no collateral.
- Unlike traditional investments, you don’t need prior experience to raise funds.
- You retain the entire equity.
- It is a cheaper way to raise funds, because no financial or legal assistance is necessary. You also do not have to repay the funds.
- It connects you with a diverse group of investors who will help advertise your product.
- It is especially beneficial to startups who are having difficulty obtaining funding from angel investors, venture capitalists or other traditional methods.
- It helps with market validation of your product
- It is a excellent way for new investors to diversify their portfolio.
Cons of reward-based crowdfunding
- Very few campaigns are successful in attracting investors.
- If your goal isn’t met, the raised funds are usually refunded to the investors.
- It is not good for businesses looking to expand, since there is a limit to the funds that can be raised.
- There is always a risk of theft when you share your product online.
- There can be an issue with the ownership of the product idea, in case of ambiguous policies. You can read more about the legal risks here.
- It is time-consuming and requires lots of marketing to reach your goal. Successful campaigns rely heavily on substantial marketing prior to the campaign’s launch. Jingling Tech is a good example of this.
Who can go for reward-based crowdfunding?
Startups and SMEs are best suited for reward-based crowdfunding. This type can also be used by those who want to generate funds for a multimedia project. It does not, however, work well for enterprises looking to expand or for repaying loans. Reward-based crowdfunding is further targeted towards startups in their early stages, before they attract the attention of seed/angel investors and venture capitalists. It's also useful for short-term financing, such as raising funds for advertisements.
FundingX: An Example
FundingX is an Indian Reward-based crowdfunding website that aims to bring Indian innovations to the market. They support “Made in Bharat” and are focused towards startups that deal with fields like technology, transport, kitchen and home appliances. They also provide an assured reward-based crowdfunding, helping startups to retain 100% of their equity. What sets apart FundingX from others is low fees, free registration, campaign verification, and assistance with pre-orders. As a result, they are extremely reliable for both the campaigners and the investors.
In recent years, reward-based crowdfunding has achieved a breakthrough. Because of its multiple advantages, it is favored over other forms of raising funds online. However, before investing or launching a campaign, you must carefully analyze all of the available options and choose the model that best suits your needs.
