In recent years, the explosion of rewards-based crowdfunding websites such as kickstarter.com and indieagogo.com have opened up new possibilities for entrepreneurs to raise money from thousands of individuals to get new products to market or to accelerate the growth of promising ideas into real businesses. In these crowdfunding sites, depending on the amount of money that an individual contributes, he/she may receive a “reward” in return for their contribution. The range of rewards are endless, from an emailed thank you note for the smallest contributions, the product itself for more moderate contributions, or even a meal with the founders for more substantial contributions.
But after a successful rewards-based crowdfunding campaign, entrepreneurs must expend efforts in delivering the promised rewards, which means that the capital raised cannot immediately be used to grow their companies — they must satisfy their funders first. Thus, a good portion of the funds raised may be used to deliver on the promised rewards, with the amount raised often not going as far as anticipated, hampering the business’ growth goals.
Entrepreneurs looking to raise capital for their businesses from individuals now have another option: equity-based crowdfunding. Instead of crowdfunding in exchange for a reward, entrepreneurs can now ask funders for cash in exchange for loans or equity. Unlike with rewards-based crowdfunding, companies do not have to spend time fulfilling rewards for their funders; instead, they can immediately place the cash into their companies and start working toward their envisioned growth.
While equity-based crowdfunding provides great flexibility for entrepreneurs, rewards-based crowdfunding still has its place: it’s a low-risk, low-barrier way for both entrepreneurs and funders to test the market. In fact, equity- and rewards-based crowdfunding can complement each other, creating valuable synergies for the same businesses. Entrepreneurs successful at a rewards-based crowdfunding campaign may be the very same ones finding success in an equity-based crowdfunding campaign. Moreover, the funders of their rewards-based campaign can be the same funders for their equity-based crowdfunding campaign — after all, it’s easier to sell to people who already believe in the company or product. With equity-based crowdfunding, these dedicated backers maintain a relationship with the company, and the success of their investment is tied to the success of the company, thus representing free word-of-mouth promotion from substantial numbers of people, helping to ensure the company’s success.