Understanding Reward-Based Crowdfunding
Some theories you may skim.
Crowdfunding is the concept of more people donating smaller amounts, which helps in two ways – raise larger quantities and get millions of people to know about the project/initiative.
While on the contrary, reward-based crowdfunding refers to a founder promising sponsors that he/she/they will give sponsors a non-monetary reward in the future in accordance with certain conditions.
This reward behavior is mutually beneficial because the founder informs the sponsors of the outcome. The founder usually designs different types of rewards to appeal to different categories of sponsors; the rewards are contingent upon the contributed money.
Through reward-based crowdfunding, many supporters, collectively forming the “crowd” each provide a freely chosen amount of money for a specified activity, often a product development process.
The potency of rewards increases with the increasing sums one contributes. While small sums may be typically associated with symbolic rewards (invitation to a specific internet forum/community, for instance), as they increase, one may get involved in a meeting with the creator and play a part in creativity and development or other forms of recognition.
In addition to early access to the product, supporters typically receive the product, 25% to 50% below the envisioned list price of the final product, upon the development completion.
Firms are nexuses of explicit and implicit contracts, and stakeholders contribute such that subjective gains are in equilibrium with subjective inputs.
As a creator/entrepreneur, why would one bank on reward-based crowdfunding, you may ask when such formal (and feasible?) sources exist?
Why Ideas/Start-Ups Die
As the start-up industry mushrooms, affluent individuals have been rushing to the sector, unaware of the associated risks and profile of investments. Genuine investors occasionally lose out due to this abundance of angel investors with dubious qualifications. When individuals with inadequate industry knowledge invest in a business, their objectives diverge from those of the founders and other investors.
When an individual divides their funds, expertise, and the ultimate value addition among several start-ups, the idea of ‘angel investing’ is jeopardized in the first place.
In addition to insufficient money, other factors like poor management, a substandard pricing model, and hence, lack of consumer demand come into the picture.
And what follows is quite tragic: Dying of the Start-Ups.
Let’s see why an investor would be reluctant to invest:
- Their interests may be diluted
- They may not be as passionate about your idea or might not have studied your industry in the first place.
- They’re in for something unfeasible for you to give (a considerable share in equity, for instance)
Quite a problem isn’t it. Not every problem has a solution, although this one does 🙂
Let’s look into it.
The Way Through
No wonder there are no angels anywhere who would put money into a campaign out of the goodness in their hearts.
They are undoubtedly in for something. Something in return for their money. A share in equity? Probably.
Imagine finding someone passionate about your business, who believes in you and desires your good! What if you’d not want your Equity to dilute? What if you do not prefer being dependent on finding the right investor and want those greenbacks! You crowdfund, and you look for Casual Supporters.
Nevertheless, the Casual Supporters are in for ‘something.’ Let’s called this ‘something’ a reward?
Well, selfless good deeds do not exist. You do good only because you expect the same to come to you. Anyway, without delving deeper into philosophy, let’s see the motives or payoffs behind the ‘casual supporter,’ as regards the research article ‘Why supporters contribute to reward-based crowdfunding-
-Consumption: Most reward-based crowdfunding campaigns offer the final product at a discounted price later than the expected market prices.
This expected utility is potential factor supporters rely on.
-Altruism: “Reward-based crowdfunding has its roots in the charity field, and the altruistic motive might play a role for reward-based crowdfunding as well (Gerber and Hui, 2013; Ordanini et al., 2011).” It can be for a cause or to support a specific person or group. Though upholding the philosophy mentioned earlier, the funders do so for it is psychologically rewarding.
– Social Belonging: Obtaining information on a project would create a degree of involvement for the supporters, which may significantly appeal to them. It has been recognized in the charity literature that “donors have a desire to communicate their donations to obtain social prestige.”
There’s a lot one would have to do to entice supporters, but you may ask what’s in it for the creator himself.
Going Above & Beyond
With the nascent technology, it’s essential for businesses to continuously adapt to the dynamicity of the environment, in which potential users and consumers would want to participate in every nascent stage of development. In this light, the reward-based crowdfunding platforms tend to bring together the entrepreneurs and users to avail of the fundraising process rather than just acquiring the needed financial resources.
Let’s explore how creators can bring this into play.
- Honey bee initially, Honeycomb later: More often than not, the high level of uncertainty and intangibility of ideas associated with early creators increases the reluctance among investors about the quantum of investment. Reward-based crowdfunding, on the other hand, in addition to giving creators the opportunities to look for direct mini-fundings from their potential audience, also allures investors in the later stages of development.
- The Honey: Not only do such creators evade the constraints and limitations of the capital market, but they also have access to cost-effective capital while safeguarding the ownership and control from the venture capitals or ‘angels.’
- The Flowers (read: Audience): Reward-based crowdfunding creates an environment for communication, engagement, and collaboration, which in the bargain, helps creators with helping hands. Analogically, in the videogame industry, companies often open the code of the videogames as mods who are fans with programming skills. They engage with the product and actively help alter it for the better than just playing the game passively. As Zheng et al. (2018) point out, “Funders’ co-creation behavior led to the generation of psychological ownership, which has a positive impact on the market realization of the products.”
Moreover, let’s not forget the power of the Word of Mouth. Over 90% of consumers. Trust family and friends’ suggestions more than advertising (source: HubSpot). 79% say user-generated content highly impacts purchasing decisions (source: HubSpot).
The Stories of Success
The loyalty and size of the audience are pretty significant factors in the launch of succeeding campaigns. So much so that The Climate App tapped reward-based crowdfunding and raised more than twenty thousand pounds from 389 backers in October 2020. The team postponed their launch a couple of times because they wanted to ensure they had enough support from day one from their community as backers of successive campaigns.
Some brainy campaigns allure their audience perfectly: Crumbs Brewing: a company that makes beer out of unsold artisan bread (that would otherwise go to waste), had successfully raised 15,720 pounds from nearly 200 supporters in a mere span of 28 days back in October 2017! How?
Well, let’s talk about the rewards.
The rewards were wholly linked to the objective- people that would back them up would be the first ones to try the new types of beer, while with the highest backers, they made sure that they would be invited to a launch party of the new beers: more funds, more parties, and a total win-win.
Here’s a YouTube video you’d want to watch if you can ‘beer’ with the gust of inspiration to follow.
- Experimenting with the Honeycombs: It’s pretty evident how business models have been emerging lately. Experimenting with the strategies and variations in business models succors with the difficulties of the digital age, transforms their interaction with customers, saves costs, closes financial gaps, and develops working methods.
In that sense, reward-based crowdfunding platforms create an environment that is conducive to experimenting with and evaluating cutting-edge concepts for funding, audience development, and marketing of goods in nascence.
“The domain experts part of the crowdfunding platform showed much interest in our technology. It allowed a lot of exposure and media coverage and helped build strategic partnerships,” says Kikkeri, Founder and CEO, HoloSuit. The education vertical of the company, which initially crowdfunded its idea, also won the National Start-up Award in 2020.
By introducing entrepreneurs to their potential customers, reward-based crowdfunding platforms facilitate distribution and circumvent some traditional fundraising channels and gatekeepers. As a result, through crowdfunding, business owners can immediately access new markets as supplements.
This process suggests that traditional value chains increase complexity due to new technologies and transform into value networks (Keeble & Cavanagh, 2008). Resultingly, they have a wide variety of channels and networks to bridge towards the target consumers, which thereby helps them devise new techniques for creating and commercializing their products.
Are you convinced enough that reward-based crowdfunding might befit your business idea? Here’s what you should be mindful of before you proceed.
The quintessence of a successful reward-based crowdfunding campaign
Factors to consider for a successful reward-based crowdfunding campaign are:
- The Media Richness
A founder must explain their project, its related conception, message, plan, concrete procedure, etc., on the crowdfunding platform.
Usually, the greater the content, the more it hints at transparency.
However, the images and text should tell a story about how your business is solving a problem and how you are solving it uniquely.
Kuppuswamy and Bayus (2017) argued, “The performance of projects that provide images is better than those that do not. Of the successful projects, 80% of them included images in their introductions.”
Most of the audience browses the images or the videos first, then read the text content if they are still interested.
When founders continuously disseminate information about the project’s advancement to the sponsors, the sense of belongingness and mutual trust elevate.
Hence, the signal theory is an indicator of founder responses, a formal website, and frequent project updates being clear signals from the founder to manifest his endeavors on strengthening social ties with the sponsors, thereby reinforcing sponsors’ investment behavior.
Four management actions can significantly improve the effectiveness of funding during the funding period: updating the renewal report of the project, providing clear objectives and deadlines, influential eliminating sponsors’ concerns and worries, and enabling sponsors to continue giving money (Kuppuswamy & Bayus, 2018; Mollick, 2014; Steinberg, 2012; Witt, 2012).
- The Reward & the Kindness
“In a crowdfunding scenario, a potential sponsor will be attracted to a founder’s vision if the value unity exists between the two parties. Furthermore, value congruence can inspire sponsors to create emotional bonds and build perceived trust between founders and sponsors (Williams, Pillai, Deptula, & Lowe, 2012).”
Funders of reward-based projects may reward sponsors through cash prizes, discounted future products, books, or statements of gratitude, categorized as non-financial returns to the sponsor. The founder’s desire to share the ‘harvest’ of the project with contributors shall effectively instill what it takes to achieve constant support.
- Openness & Receptivity
A research paper ‘Journal of Business Venturing’ (add citation) suggests that “…both a passion for activities related to the venture’s domain and the product or service it provides (i.e., product passion) and a passion for founding and developing new ventures (i.e., entrepreneurial passion) are important to funders. Both passions become even more appealing when the entrepreneur demonstrates openness and receptivity to feedback, thereby protecting against the potentially “hot” and extreme elements commonly associated with passion.”
Do you see how Openness to Feedback plays a role more significant than the Entrepreneurial Experience itself!
At the end of the day, it comes down to the audience- attracting and retaining them. The more judiciously you plan and segment your rewards, the more rewarding shall your crowdfunding campaign be.