REWARDS CROWDFUNDING PROS AND CONS
Do you want to discover the crowdfunding pros and cons to help decide whether to go ahead or not?
You’re in the right place.
The appeal of rewards crowdfunding is clear: creators can use it to raise money and make their idea happen.
However, certain projects are more naturally suited to rewards crowdfunding than others.
Just as importantly, creators should have certain characteristics to make rewards crowdfunding a ‘fit’ for them personally.
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Table of Contents
1. TESTING VIABILITY IN PUBLIC
Rewards crowdfunding allows creators to test their assumptions about whether or not there is a viable market for what they want to make, before going to all the trouble of actually making it. Through their campaign, creators get to find out exactly how many units to produce for their initial manufacturing run rather than need to try to guess. It means they don’t need to worry about running out of inventory, or producing so many that they end up gathering dust in a warehouse.
Jack Yao raised US$816,269 for Trio – computer monitors which provide more screen space for laptops users while on the go. For him, the appeal of rewards crowdfunding was: “The cash represents actual sales. Pre-orders like these make our inventory investment less risky, and are a testament of market traction. All in all, it de-risked our business model.”
Since crowdfunding is such an excellent demonstration of product-market fit, the highest profile projects can also gain the attention of distributors, manufacturers, and even investors.
Ocean Bottle discovered this when they raised US$229,580 on Indiegogo, as their co-founder Nick Doman explains: “Crowdfunding helped us to prove the business case. Since finishing our campaign, we have had a lot of approaches from investors both big and small inquiring about being included in the next round of funding, if there is one. We didn’t expect that necessarily, but our campaign really helped investors hear about us.”
Among the crowdfunding pros and cons, there is a dark side to doing viability testing in public. Since the amount of money a collected is displayed on the campaign page for for all to see, anyone can easily discover which campaigns are performing most strongly. Unfortunately, some unscrupulous manufacturers make a business out of finding popular crowdfunding campaigns and counterfeiting their products. They take the concept, reverse-engineer it, and may sell at a significant discount to the original. This can undermine the premium pricing that many crowdfunding creators try to achieve, and can confuse backers if they see a product already for sale which looks the same. To make matters worse, the fakes can cause damage to the brand reputation if the copies are poorly made. This is a major issue for rewards crowdfunding creators.
2. MAINTAINING CONTROL
Having control over their work is one of the main drivers for many creators. When publishers or investors get involved, new obligations exist – the kinds which can sometimes resemble having a boss telling you what you can and cannot do. By gaining funding from the end-users through rewards crowdfunding, creators get to retain 100% ownership of their work. They also keep all of the upside from what they make.
Mark Henry runs SOLIDTEKNICS and raised AU$50,521 for ‘The Solid Cookbook’ (among dozens of other successful campaigns). Henry is well-placed to comment on the relative merits of different funding approaches, having had professional investors for an earlier venture, before his foray into rewards crowdfunding. “I built a company the traditional way before. I had bank debt and I had equity investors. It worked out great – I was able to grow it and eventually sell it. But I ended up working for the bankers and the shareholders. I didn’t mind working hard, but I didn’t enjoy my strategy being shaped by other people. Thanks to crowdfunding, we’ve got no outside equity investment in SOLIDTEKNICS, and we’ve got no debt. We fund all our product development through being cashflow-positive from the beginning. Crowdfunding frees small entrepreneurial creators to build their vision on their own terms.”
Having a binding relationship with a publisher or equity investor also has a positive side – they stay interested for the longer term, and can bring benefits beyond the money raised. For example, they may provide valuable introductions, and/or provide their expertise to further the project’s progress. The relationship between creators and crowdfunding backers can be less enduring, especially if they have bought the product as an impulse purchase rather than due to their connection with the creator’s back-story. Backers may lose interest once the product is delivered.
3. LISTING ON A TRUSTED PLATFORM
It is much simpler to setup a page on a crowdfunding platform than to start your own website, especially for non-technical creators. Trying to figure out website hosting and a payment portals is frankly beyond a lot of people. Posting a rewards crowdfunding campaign is more like writing a social media update through a platform like Facebook. It has been designed to be easy for anyone.
As mentioned earlier, rewards crowdfunding platforms can also offer substantial exposure to their own audience, for well-executed campaigns. This can be the equivalent of putting a shop on a busy street with lots of foot traffic. Even if you plan to raise the money mostly through friends and family, a crowdfunding platform provides trust and simplicity. Directing people to a crowdfunding campaign page to make their payment often works out to be better administratively than bank transfers. Creators can more easily track who has backed, and for what amount.
The business model of crowdfunding platforms involves collecting a percentage of all funds creators successfully raise. These fees are sliced off before the platform delivers the rest of the cash to the campaign creator’s bank account. It’s one of the main drawbacks in this list of crowdfunding pros and cons.
Critically, the crowdfunding platforms charge this fee regardless of where the backer came from. This means the creator pays a fee even on backers the crowdfunding platform had nothing to do with finding. There would be no need to pay that fee if the money had instead come through the creator’s own website, or via a direct bank deposit.
Another issue with using rewards crowdfunding platforms is that platforms have more limited analytics tracking than regular websites. Realize that some digital marketing techniques are more restricted on crowdfunding platforms.
4. CLEAR DEADLINES
Without deadlines, it is possible to work on projects forever without having any pressure to finish them. By its very nature, rewards crowdfunding imposes deadlines on creators. They must set a campaign period deadline, and a delivery deadline for the reward. This can introduce the discipline to keep moving forward. It means creators can get leverage over themselves.
The deadlines of crowdfunding helps to get things done, but can also impose a lot of stress on creators. There are immense benefits to rewards crowdfunding, but no-one ever says that it turned out to be easier than they thought it would be.
A rewards crowdfunding campaign can be used as a real moment for creators to focus on promoting their project in a way they would not ordinarily do. With alternative methods of raising external funds (such as through banks or venture capital), fundraising and marketing are usually treated as two separate activities. One of the benefits of crowdfunding is that it can be used to raise money while also promoting the project at the same time.
The downside of this extra exposure is the potential for it to backfire if the campaign does not reach its target – or worse, if it succeeds in raising the money but the creator then fails to deliver the reward.
A failed product launch from a small-time creator can often be swept under the rug, but crowdfunding failures are much more public. When you put yourself out there and try to drive a lot of attention to what you are doing, there is always the danger of suffering a public embarrassment.
If you want to know how to run a successful rewards crowdfunding campaign (with even more about the crowdfunding pros and cons), check out this step-by-step playbook! It explains rewards crowdfunding – from start to finish.
The New Book - Rewards Crowdfunding.
Launching March 2020
✓ How Rewards Crowdfunding Works
✓ Learn From Rewards Crowdfunding Success Stories
✓ How To Build Your Crowd, Even If You Don't Have One Yet
✓ The Differences Between Kickstarter vs Indiegogo
✓ Everything Else You Need To Launch Your Own Campaign!