Rewards-based crowdfunding has been a source of funding for small businesses. Businesses and non-profits of all sizes post projects on a crowdfunding portal, targeting a certain amount of capital to raise. In return for a donation from fans of a project, the business or non-profit typically gives some type of incentive for participating—that's why it's called rewards-based crowdfunding.
Crowdfunding’s early success came from sites like Kickstarter and Indiegogo. While there are actually four main categories of crowdfunding, one of the most popular is rewards-based crowdfunding—the kind used on Kickstarter and Indiegogo.
History of Rewards-Based Crowdfunding
Though crowdfunding was brought into the mainstream consciousness with platforms like Kickstarter and Indiegogo, these certainly weren't the only sites to provide it.
Raise Money Like a Rockstar
According to the crowdfunding website Fundable, the history of crowdfunding began in 1997 when the U.K. rock band, Marillion, financed their reunion tour via ArtistShare, a fan-funding website.
Raise Money and Prosper
In 2006 Prosper, one of the pioneers in the peer-to-peer lending space enabled individuals to lend and borrow money outside of traditional banking channels.
Funding Goes Mainstream
In 2009, mainstream crowdfunding websites like Indiegogo are launched and the beginning of a new form of crowdsourcing financing—crowdfunding—is established.
Donors Receive Protection Under the Law
With crowdfunding in full bloom, President Obama passed the Jumpstart Our Business Startups (JOBS) Act in 2012. This paved the way for a real regulatory approach to protecting donors to crowdfunding projects and enabling businesses to turn to crowdfund as a significant source of funding.
Kickstarter is the largest rewards-based crowdfunding platform. According to the Kickstarter site:
- Donors had pledged over $4 billion to projects on Kickstarter
- Over 171,000 projects have been funded successfully
- More than 16 million people have backed projects
- 5.5 million people have backed more than one project
- Over 56 million total pledges have been made
Popular Types of Crowdfunding Projects
It turns out that while plenty of artists use crowdfunding to raise money for their activities, one of the most popular categories of crowdfunded projects is technology.
Gamers are tech-savvy and have been early adopters of crowdfunding platforms, using them to fund ideas for new games and peripherals, like game controllers. Crowdfunders of gaming don't expect a return on their money and are glad to help promote programmers working on cool projects.
How Rewards-Based Crowdfunding Works
- A business, nonprofit or entrepreneur posts a project available for funding on a crowdfunding platform like RocketHub with a set deadline.
- Frequently, special promotional videos are produced to help get backers interested in the project.
- The founders of the project share the crowdfunding opportunity with friends and family.
- Interested backers donate to the project, sharing their activities over social networks.
- In return for backing a project, backers receive rewards based on the amount of funding they commit—defined by the business or entrepreneur behind the project.
- If funding targets are hit before the project's deadline, the deal "tilts." Money is exchanged, and rewards are committed
- Typically, within the months following successfully-funded project backers receive their rewards, though research shows many of the rewards are late in their delivery.
Laws are changing, making it easier and more popular to crowdfund projects. With the wind at their backs, crowdfunding platforms are expanding their product offerings and are more aggressively courting new users of all types.