Reward-Based Crowdfunding: The Aspects Often Overlooked
Ye! analyzes what aspects to be aware of when crowdfunding.
By Emma Broholm
Crowdfunding is an extremely popular way for entrepreneurs to fund their project. There are many different platforms and types of crowdfunding. The definition of crowdfunding varies, but it often includes the following key components: 1) raise funds in small amounts, 2) from many to many, 3) while using digital technology. The most popular type of crowdfunding is reward-based (e.g. Kickstarter and Indiegogo). This means that funders receive a non-monetary return, such as products related to the projects. With reward-based crowdfunding, the project owner never pays interest or a share of their business earnings.
Why has crowdfunding become so immensely popular? First and foremost, it is easier to get multiple small amounts from multiple people, as opposed to one large amount from one person or institution, because of this everyone can contribute. It is also easy to connect with many potential contributors via social media. This is a good way to get the message out to the target audience (and beyond). To learn more about the different types of crowdfunding, check out our previous blog post on crowdfunding.
Crowdfunding remains one of the up-and-coming ways to fund your project. However, there are aspects of reward-based crowdfunding to be aware of. Below Ye! Community identifies a few elements of reward-based crowdfunding, which are often overlooked.
1. Social media can be a great resource, but it also has its drawbacks.
To create a successful crowdfunding campaign, it is important to dedicate a significant amount of time and energy into social media outreach. If you don’t do this, you lose the chance of your campaign reaching a significant number of potential contributors. However, if you do create a large social media buzz, attracting many customers and funders, the audience will be much larger should your campaign fail to reach its goal. First time entrepreneurs only have an 18% chance of success. Failure is not necessarily a negative thing, but it is important to keep this in mind when starting up. Failure is often a necessary step in the process to finding success. By way of advertising your business you have managed to reach a broad audience and most likely triggered your audience’s interest. Make sure to have a communication strategy prepared in case you do not reach your target. Should you fail, remain transparent and upfront about why you failed and communicate this to your audience. Perhaps your failure may encourage you to try again using a different strategy.
2. Be aware of what you promised your funders.
If you do decide to go for reward-based crowdfunding your funders will expect something in return. Make sure to take the costs, like shipping and manufacturing into account when requesting funds. If you ask for €50, but it costs you €100 to fulfill your reward, it is obviously not worth the effort.
3. Keep in mind that funders are not experts.
Just because they invest in your project does not mean that the business will be a success. It might be a great idea but not one that is easily commercialized. Unfortunately, 75% of all successfully funded ideas fail. Check out this analysis and to ensure you don’t fall victim to the same mistakes.
4. Read the fine print.
Question: who owns a fresh idea presented on during your campaign? If someone commenting on a project submits an idea, can you, as the project owner, use this comment without giving the commenter credit for it? This depends on the crowdfunding platform. Some platforms let you use the idea. On these platforms the project creator owns all submitted comments (e.g. Indiegogo). Other platforms (e.g. Kickstarter) stipulate that you must negotiate with the commenter. Always be aware of the fine print for every platform. Fighting with people on the Internet is never a good idea, but especially not when it comes to crowdfunding contributions and your enterprise.
5. Keeping up your crowdfunding campaign is a full-time job.
It’s up to you to make sure your campaign looks professional, is kept up-to-date, promoted, and monitored to ensure all questions your funders might have are answered quickly. During all of this, you still need to take care of your core enterprise. Be sure to keep up the momentum so when you raise the funds you can immediately put them to good use.
Do not be discouraged to launch your project! Make sure you do your research up front, are aware of all the details and create a strong plan in the case that anything should go wrong. Raising money in never going to be easy. Crowdfunding may offer the best opportunity for funding your project. Whatever platform you choose, make sure it works for you. There are many different platforms and types of crowdfunding. Look at them all and decide which one is best for you and your funding needs.
To help you on your way, here are 7 tips from successful business, funded by reward-based crowdfunding platforms. Just remember that nothing about starting your own business is easy. Finding funding, unfortunately, isn’t either.
Emma Broholm graduated from Leiden University with a degree in Law. She is currently an intern with Child and Youth Finance International. She is an alumni of the European Youth Parliament and has previously had articles published in Microfinance Gateway.