A common question that many backers have is: What exactly does one get in return for giving money to a crowdfunding campaign? Are you supposed to be satisfied with just the 'joy of giving?'
Here's what crowdfunders get in return:
Rewards campaigns - Perks that may or may not include the product.
Donation campaigns - Typically nothing but this depends on the campaign.
Equity campaigns - Equity in the company they give money to.
Loan crowdfunding - An interest rate in return for their loan.
As you can see there are different types of incentives that backers have to give their money. These might change though depending on the campaign's creators. So how do rewards and incentives really work?
Campaigns and Rewards
There are many different types of crowdfunding campaigns out there and what backers get depend heavily on them. In fact, reward types are not set in stone and often depend on the campaign creators' choice.
When crowdfunding first began, the idea was for people to be able to back cool projects or ideas that would help spark creativity. This led to a number of projects being funded on a donation basis.
Donation Based Campaigns
Donation based crowdfunding still exists and makes up a large number of crowdfunding campaigns.
As you can imagine there are no rewards here as such and neither is there an expectation of one. After all, you're donating money to a good cause.
You might receive a few perks though depending on who's raising money. P2P crowdfunding campaigns typically offer a number of perks including t-shirts and other merchandise. These are usually pretty well coordinated by large nonprofits so it stands to reason that they will offer something to their donors.
The majority of donation based campaigns are run by individuals and as such you can't expect anything huge.
At best, you can expect updates and the sincere thanks of the person you're donating money to.
Rewards Based Campaigns
These are the large majority of all crowdfunding campaigns and tend to be the most heavily covered in the media as well as by backers.
Rewards based crowdfunding evolved from the earlier donation based models when it became clear that a lot of backers wanted some sort of reciprocity from campaign creators.
After all, backers donate money and the creator uses that money to make a product. In return, giving the backer just a thank you note is a bit unfair.
Equity based rewards were not possible back then so creators needed to offer perks. Perks are a huge part of crowdfunding campaigns and these days, they are the backbone of he way in which such campaigns are viewed.
A creator might have a great product but unless the perks are on point, the campaign will usually not attract a lot of attention.
Creators are best served by hiring someone who understands how rewards need to be structured and what kind of perks need to be offered in order to entice backers.
In fact, the structuring of rewards has become something of an art form these days and even the likes of Kickstarter devote large amounts of space to helping creators understand how to build rewards.
Backers typically receive some combination of the product or service on offer at all levels of contribution. The higher the contribution, the more desirable and varied the reward is.
Let's say you contribute money to an author in order to crowdfund their book. A $25 contribution might get you three versions of the book along with an autograph.
A $50 contribution might involve a box set with a personalized note in each book or some other form of customization.
Higher levels of contribution might receive a hardcover with special artwork and a poster depicting the characters in the novel and so on. It's really up to the creator! There are even some rewards based campaigns that don't offer rewards.
Mind you, these are a very small subset and more often than not, such campaigns won't have a huge level of success. It really comes down to whether the type of campaign makes sense for a zero reward structure.
As a backer, rewards based campaigns offer the least amount of risk. You are legally covered and can sue creators in case they fail to deliver on their promises. You don't need to worry about your money going missing and so on.
Equity Based Campaigns
These types of campaigns are a more recent creation, along with crowdfunded real estate. The latter aren't campaigns as such and truth be told, they don't make for the best investments.
Since they aren't campaigns I'm not going to be spending too much time on them. Instead, let's look at the world of equity crowdfunding.
These campaigns help startups raise capital and provide them with a far more efficient avenue to raise funds. While the majority of platforms allow certified investors to contribute money, there are a few that allow companies to solicit money from individuals.
Equity campaign backers receive a share of the business they're investing in. As you can imagine, this comes with a huge amount of risk.
The business might fail to produce anything and the equity a backer receives is going to be worthless. Equity campaign backers don't even have the consolation of getting a t-shirt!
However, with greater risk comes huge rewards. Quite a few startups make it through the initial phase an go on to raise money from venture capital firms. This results in a massive financial windfall for equity backers.
While the path is tough, prudent investment principles and prior experience in the industry often help equity campaign backers locate good investments. This is one of the reason why a lot of platforms don't allow unregistered investors to take part in the process.
There are a wide range of companies that seek to raise funding through equity crowdfunding campaigns and choosing the ones operating in fields you have some expertise in is the best way forward.
Loans were one of the first financial instruments that took advantage of the crowdfunding phenomenon. Platforms arose overnight that gave creditors and debtors a great way to connect.
Debtors got to borrow the cash they needed while creditors could spread their money across different debtors and earn a rate of return on the money they loaned to them.
What really makes loan based crowdfunding great for backers is that they can design their own custom portfolios and invest into a predesigned portfolio that automatically allocated money to debtors across various credit ratings.
This allows then to avoid the hassle of constructing an entire portfolio by themselves and having to evaluate individual debtors one by one.
Despite all this, loan based crowdfunding is risky and there is a very good chance that backers will not see any returns on their investment. It might not be as risky as equity based funding but it certainly is far riskier than backing rewards based campaigns.
The type of reward that backers receive depends on the type of campaign they're backing. The riskier campaigns don't offer much in return immediately but hold the promise of future returns.
Rewards based campaigns offer perks up front but don't offer anything beyond this. At the end of the day, the risk inherent in the campaign dictates the type of rewards backers receive.