Rewards-based Crowdfunding Guide: How to invest in startups for rewards

What is Rewards-based crowdfunding?

Rewards-based crowdfunding is the sourcing of money from a crowd of people to a project. The owner of the project presents its worth to the crowd of people and if they like it, they provide money to work on the idea to completion. In return, the crowd of people get an incentive (or reward) based on criteria that the owner of the idea has decided upon.

what is rewards based crowdfunding

Figure: What is Rewards-based Crowdfunding

This kind of crowdfunding is good for small business, mostly startups, which are pursuing funding for an invention which serves a specific purpose and is likely to have a large market up-take due to the need it satisfies. Furthermore, it supports an upcoming inventor who would otherwise be bothered by the burden of a bank business loan to actualize a brilliant idea.

How it works

Below are basic steps along the way to a successful rewards-based crowdfunding process:

  • A willing investor looks for a reputable crowdfunding platform.
  • A project owner convincingly describes their idea on the crowdfunding platform.
  • The funders provide funds to actualize the idea.
  • Investors donate funds to run the idea.
  • After successful completion, the project owner rewards the funders who funded the idea. As an example, consider an idea where a project owner recycles wooden pallets to make outdoor furniture. The funders get a piece of furniture as a reward.

With more project owners actualizing their brilliant ideas this way, there are more success stories from rewards-based crowdfunding platforms that increase the likelihood of getting valuable rewards from investing in it.

Source: NerdWaller

A typical rewards-based crowdfunding project goes through the following stages from inception to delivery:

Idea Conception and Organization

  • A project owner determines an idea that they are passionate about and which satisfies a real need in society.
  • The project owner designs a model of the product on paper and/or in real life.
  • The next step is to draw up a budget of the raw materials and tools, labor, and any other attendant costs needed to make a complete product. The number of products to be made is also determined at this stage.
pebble time smartwatch

Figure: The Pebble Time smartwatch. It received $1 million in funding within one hour of the project launch.

Preparation

The project owner carries out in-depth research to determine the best rewards-based crowdfunding platform. This is a very important step for the project owner to ensure the idea is not stolen by scammers, and to ensure the least amount of energy is wasted in convincing a more willing crowdfunding audience.

Presentation

Most successful presentations of a crowdfunding project contain a balanced mix of video, slideshows, and models of the product or service. A good solid presentation will draw sufficient funding to carry the idea to fruition. A project owner carries out research and includes other people with mastery of the product to back up their presentation.

Funding

This stage comes after a successful presentation. Many interested funders will donate to the idea at this point, while others may need more coaxing. The project owner responds by being available to elaborate on inquiries regarding the product, which leads to more donations.

Production and Delivery (includes personal Wrap-up report)

After getting funds, the project owner goes back to the product blueprint and creates a complete and ready-to-use product. Any equipment needed to support continuous production is purchased at this point, and so are additional workers to satisfy the labor requirements including delivery to the funders.

As a matter of good planning and to make successful crowdfunding requests in the future, it is very important for the project owner to write a Wrap-up report with details of how the entire project happened. Anyone who approaches this project owner for information about rewards-based crowdfunding will be potential customers of the product.

Case study: Rewards-based Crowdfunding investment

We cannot discuss rewards-based crowdfunding without mentioning the Pebble Time smartwatch project. It is one of the most successful rewards-based crowdfunding investments in history raking in a whopping $20.4million from 78,741 crowd funders or backers as they are known on the crowdfunding platform “Kickstarter”.

The Pebble Time is a smartwatch developed by Pebble Technology and assembled by Foxlink, released on 14 May 2015. This is the first smartwatch to introduce a color e-paper display, as well as a microphone, a new charging cable, and a new Pebble Time-optimized operating system. (Wikipedia)

Within the first hour of its launch, the project received $1million from backers.

The backers got a minimum of one customized Pebble Time smart watch at 20% of the retail price. The more the amount donated, the more the rewards. Some funders got:

  • more Pebble Time smart watches
  • choice of three colors for the smart watch
  • personal choice of color of the Pebble Time smart watch
  • personal choice of color of the smart watch, and matching leather strap and metal strap
  • Some backers

Source: Wikipedia and Kickstarter

kickstarter campaign

Figure: A screenshot of the confirmation of funding for the Pebble Time smart watch.

Market size, growth, and forecast

According to the Global crowdfunding market size, status and forecast 2021 – 2027 report, the global Crowdfunding market size is projected to reach USD 23.2 trillion by 2026, from USD 12.3 trillion in 2019, at a CAGR of 11.2% during the forecast period 2021-2026.

Out of the above amounts, rewards-based crowdfunding accounts for 74% of the total. With the total growth expected in 2020 standing at USD 13.78 trillion, rewards-based crowdfunding is expected to be 10.2 trillion in the same year.

Source: Valuates Reports

Rewards-based crowdfunding is a shrewd investment and funding for a pre-business incubation environment. Many crowdfunded ideas turn out to be huge companies, with their investors becoming profitable shareholders.

Furthermore, forecasters expect rewards-based crowdfunding to grow due to the current pandemic which has slowed business.

Pros & cons for investors

Pros

  1. It is a smart way to invest and earn without having to  organize the work for the project owner.
  2. Flexible to invest as it does not require a huge initial amount, yet has good returns
  3. No investment management or knowledge required
  4. Diversified investment portfolio. Reward-based crowdfunding is the nursery of many profit-making inventions.
  5. Rewards-based crowdfunding does not require a formal structure like traditional stock markets and other investment programs.
  6. An investor can directly make a difference in the community, because the simplicity of rewards-based crowdfunding makes it permeate every level of society while remaining a structured means of generating funding for an idea.
  7. Free marketing of an investor’s influence, due to all the publicity raised on social media by the project owners and investors alike.

Cons

  1. Uncertainty of returns, especially if the project does not reach its goals.
  2. The tangible reward may not match the value donated.
  3. No influence on the progress of the investment.

Risks

As with any investment, rewards-based crowdfunding does have real risks to contend with. Some are discussed below to cushion a wary investor against making a bad decision or to prepare one for the outcome of such investments.

Rewards-based Crowdfunding Guide: How to invest in startups for rewards

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