Crowdfunding is a novel form of alternative funding for a variety of ventures, allowing individuals to raise capital quickly by opening up to investments from the public.
Drawing inspiration from micro-financing and crowdsourcing, crowdfunding occupies its niche in the alternative investing space.
While the concept of crowdfunding seems to be evolving, it can be broadly defined as the entrepreneurial efforts of individuals or corporations to fund their ventures by drawing on relatively small contributions from a large number of people through internet platforms, bypassing the need for traditional financial institutions.
The advent of the internet has created platforms offering different types of crowdfunding, the most common of which is rewards-based crowdfunding.
What is rewards-based crowdfunding?
Rewards-based crowdfunding offers a product or service in return for monetary contributions to the project.
They usually take place over an online platform which charges a small fee for successful projects. These include major players like Kickstarter and Indiegogo.
How does it work?
Backers are those who buy from startups on crowdfunding platforms. They can usually be categorised into two categories: those who appreciate the value of the cause and those who see value in rewards promised by the campaign.
The reward is commonly offered in three ways:
This has quickly become one of the most attractive rewards in funding. In exchange for a small contribution, backers are rewarded with exclusive early access to the product.
This can be observed in the music and gaming industry.
Artist often provides an exclusive preview of albums, and video game developers provide beta access to backers, which can also serve as a conduit for feedback and evaluation. Also, startups offer to buy their future product at idea stage with a substantial discount, which is always appealing to those who look for innovative products.
Used when the nature of the project is unsuitable for providing pre-orders. Services include developers writing code, campaigners offering backers a free meal or entrepreneurs offering a free trip to their headquarters
Recognition is often used as a tokenistic measure of gratitude for relatively small contributions. As a show of appreciation, campaigns can offer to list backers’ names on their website, issue collaterals related to the campaigns (t-shirts and mugs) or even craft a thank-you note!
Why choose to fund this way?
Rewards-based crowdfunding is an attractive option for funding entrepreneurial ventures to gain much-needed capital, especially in the infant stages of a start-up.
Reasons such as the immaturity of product or asymmetry of information in the investors’ space may prevent entrepreneurs from obtaining sufficient funds from angel investors and venture capitalists.
Also, rewards-based crowdfunding represents a rather simple and low-cost option for fundraising. Entrepreneurs can reach their funding goals without committing their capital or requiring financial and legal advice.
Unlike other forms of crowdfunding, they retain equity in the business and are not under obligation to finance borrowed capital.
Lastly, it also serves as a helpful gauge in estimating public interest and validating one’s idea.
Disruptive innovations or a sound product will naturally gain a large following on crowdfunding platforms. Conversely, a project that does not gain enough traction is an indicator that it lacks market value.
Hence, this is a great way to “fail fast”. Rewards-based crowdfunding has the additional benefit of creating a truly passionate army of advocates behind your business.
Research has shown that rewards-based platforms are more likely to attract individuals that fundamentally “like” or “enjoy” the project. They are intrinsical to support the cause, even if there are little monetary returns.
Tips for a successful campaign
Research has shown the importance of social networking in boosting the probability of success. Entrepreneurs can leverage online presence and public relations to garner more attention.
Projects with frequent updates can almost double the probability of successful fundraising. They show a constant desire to update and reinvent the product regularly.
These can include multiple sample testing, answering community questions and providing updates on optimisation and innovation.
Display signals of quality
The importance of multimedia cannot be underestimated. Having multimedia tools to pitch ideas to the public is a clear sign of preparedness.
Not including a video on Kickstarter decreases the chances of a successful campaign by 26 per cent. Interestingly, spelling errors also decrease the chances of a successful campaign by 13 per cent and are also seen as signal of quality.
The fact that backers respond to signal of quality suggests that their decision largely hinges on a rational assessment of the likelihood of the project succeeding.
Also Read: Five trends in crowdfunding to watch in 2019
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