Do you remember Pre – 2008? When getting financing for small businesses was just a breezy? Is it possible those good old days may be back?
Recently, I looked through one of the business financing options that is becoming more and more attractive every day. By the look of the numbers, it sure is helping thousands of small businesses get their startups off the ground.
So what could it possibly be?
As of September 2016, 315,616 projects have been launched. 111,515 successfully got funded and a whopping $2,579,844,950 total dollars were pledged on ONE of the top 10 crowdfunding sites!
The wonderful thing about raising money via Rewards-Based crowdfunding is that it doesn’t take huge contributions to reasonably raise large sums of money. Instead, it takes lots of small donations from the crowd. The most common donation on Kickstarter is $25 and the average successful Kickstarter campaign raises around $8,000.
Now, Rewards Crowdfunding is nothing new. It has been around for a few years. What is making this business model more and more desirable is how it is pivoting to attract larger companies to invest in small businesses and startups.
That’s amazing considering that it started as a way to fund artists that could not raise capital for their small projects. Those that were realistically speaking “unlendable” such as art, photography, theater, music, film & video, dancers, etc. Something that started simply to help these small projects has now revolutionized the business world.
Up until recently, the Rewards Based Crowdfunding model was designed to offer products and merchandise in return for donations from the crowd. This business model helped fund a slew of startups and their projects. But here is how the industry is pivoting…
Companies are beginning to realize that Rewards Crowdfunding is a lot more than just raising money. It is a second-to-none way to conduct market research. These organizations see that backers are willing to put their money behind projects and ideas they believe in. In other words, they are putting their money where their mouth is. Especially if you post your crowdfunding projects in one of the best crowdfunding websites.
Now, if you think about it…this is huge!
For example, Proctor & Gamble and General Mills are jumping in the Crowdfunding craze. Why? According to Yahoo Finance, “P&G gets insight into consumer and investor behaviors on the innovative edges of the consumer product market. Entrepreneurs raising money on San Francisco-based CircleUp, which targets midlevel food, health-and-wellness, and apparel businesses, get access to P&G business experts to learn about topics like building their brand and growing their supply chain. The partnership piggybacks on a similar one CircleUp formed last year with General Mills.”
Now check this out. Those small businesses or startups that went through the Rewards Crowdfunding process and got investment dollars from General Mills, will also get access to the company’s backend support. This means supply chain, finance, marketing and the entire engine of this products giant.
Did you read that? You may want to read it again.
Big companies are funding smaller ones that prove to have a product or service the crowd wants!!! It doesn’t stop there. Recently a successful crowdfund withdrew their money raising efforts 5 days before the deadline. They did it even though they had reached their funding goal.
Why? you may ask.
Because in the process they were approached by other companies to license, manufacture and market their product at a much larger profit than if they had gone the Crowdfunding way. Even if they had hosted their project in the best crowdfunding platforms!
So as you can see, the imagination is the limit when it comes to Rewards Crowdfunding. It is important to point out, though, that not everyone gets funded. Only those projects that are able to attract funders who want and love what they have to offer will be successful. This means you have to do your homework before trying to go this route.
How Rewards Crowdfunding Works:
- First, a business, nonprofit, or entrepreneur posts a project on a crowdfunding platform like Kickstarter.
- Then, a deadline is set.
- Next, promotional videos that describe the project are added. These videos show how the product or service works and what it can do for potential backers. They are also used to raise awareness.
- Next, crowdfunding rewards are set. These are extremely important since they work as incentives to get people to act soon. It’s best to have at least 7 rewards tiers with different price points
- The owners of the campaign then share it with friends and family. It is important to mention here that most successful campaigns have these people already lined up way before the Crowdfunding campaign goes live. This increases the chances of the project going viral as soon as possible.
- Backers start donating funds depending on the price point and rewards they feel fit their pocket and interest. They also share the campaign with other friends and family in their social circle.
- If the campaign hits the target funding before the deadline is reached, then money is committed and exchanged.
- In return for backing a project, backers receive the crowdfunding rewards based on the amount of funding they initially selected.
- Then these backers receive the product or service they initially backed during the campaign.
Pros and Cons of Rewards Crowdfunding:
Reward crowdfunding is probably the best startup funding since the requirement of upfront capital is minimum. Most of the fees are back ended after the campaign is successful. Although, there are a few things to consider:
- Once you have a validated idea. The process is quite simple. No need for expensive legal or professional counsel.
- You don’t have to give up equity or give any collateral.
- The out of pocket expense is probably one of the lowest since most fees will come out from the funded project.
- You don’t need to qualify for credit. As a matter of fact, you can be a total newbie as long as your product or service is something the crowd wants.
- You can build your brand fairly fast. Especially if you over deliver an awesome product or service.
- Once you have proven yourself, the next campaigns will be much easier to fund.
- You can use the experience and feedback from your funders to develop future products and services.
- Rewards crowdfunding works best as startup capital. Meaning for those companies or projects that require less than $100,000 of funding. If you need more than that, you may want to consider Equity Crowdfunding instead.
- Most platforms (although not all) will require that you reach your funding goal for the funds to be disbursed. Otherwise, the funds may be forfeited.
- There is the potential risk of getting your idea stolen if not properly patented.
- This crowdfunding model works best for B2C, in other words, business to consumer. If you are looking for B2B, you may consider Equity Crowdfunding instead.
- Complicated ideas are hard to sell. Keep them simple to increase your chances of a successful campaign.
Rewards Crowdfunding: Wrapping It Up
So, here are some tips you may want to follow. To increase your chances of successfully raise rewards crowdfunding capital, you may want to make sure you do the following:
- Make sure you have a product or service that has been validated first. Meaning, you made sure they are commercially viable and people are willing to pay for whatever it is that you are trying to sell.
- You have preferable build a following or tribe prior to taking your campaign live. It has been proven over and over again that those campaigns who raise at least 30% within the first few hours of going live, exponentially increase their chances of success.
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