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Jason along with his friends had an idea of building super cool sunglasses with built in speakers and mic which will allow the users to listen to music and make phone calls. But they lacked funds. One day while browsing through the net, he comes across a website which helps to raise funds for new projects. So they put an ad campaign for their product. To attract investors they decide to give some incentives. Those who invest $10 or more get a sticker pack. Those who pledge $90 or more get a t-shirt and those who invest $100 or more get the product.

This is reward-based crowdfunding. It is considered to be the most famous and widely employed method of raising funds. Individuals or companies seeking investments before the launch of their respective products often use reward crowdfunding. A highly successful source of raising funds, small businesses or new ventures post their projects on crowdfunding websites to raise a target capital. In response to the investments made by supporters, the company gives a little incentive or a reward. With negligible risks for both investors and the company, reward crowding is mostly used in art or technology related projects.

After the company decides upon the target capital required, it sets up suggested donation amounts and attaches certain rewards to them. These rewards are always project related. For example, a filmmaker would reward his supports with a signed poster, tickets to the premier etc. Often the product itself is given as an incentive ( a DVD of the film in the case of the filmmaker). If we consider the example of the aforementioned sunglasses, then at $100 the investor would get the sunglasses whose market value otherwise is decided to be $150. The reward therefore is, the product, pre-ordered at a lower price.

Crowdfunding Rules in India: Legality & SEBI Guidelines

To kickstart a reward crowdfunding campaign apply on one of the many websites like Kickstarter, Indiegogo, GofundMe et cetera. A successful campaign should have a visually attractive presentation, detailed outline about the project, the driving force behind the idea and exciting rewards. The objective is to achieve the set target fund by attracting people both, related and unrelated to the project or the industry. People should feel connected to the project; to it's greater purpose and material aspects like incentives. Creativity and unique presentation play the key role here. An eye-catching presentation is as important as coming up with an idea for business. In the world of crowdfunding and especially in reward-based crowdfunding, a book is judged by its cover.

Unlike equity and debt-based crowdfunding, reward-based crowdfunding runs low at risks as startups don’t have to deal with shares, loans and interest rates. The cost of an ad campaign is minimal and the probability of failure is low except if the idea is unconvincing and presentation of the project is poor. In those cases, the company may fail to garner the required funds which will ultimately lead to forfeiting the whole idea. This con, however, can be given an optimistic twist. If a company fails to raise the targeted amount required for the project it can be seen as due to an unconvincing product; a product which does not suit the interest of the masses. Therefore the company can move on to work on another fresh idea.

Reward-based crowdfunding gives hope to penniless musicians, artists and designers to raise funds for their work which may have the potential to transform their respective industries. However, the category which dominates reward crowdfunding is technology. According to The Economist, in 2012, the top 10 most funded projects of Kickstarter were video games and other technology related projects. The cool sunglasses mentioned at the beginning of this post are called Zungle Panther and is one of the highly funded projects of Kickstarter.

Reward-based crowdfunding is the only method with negligible risks as compared to the other methods- equity, debt and donation. However, it raises only a limited amount of capital and not all campaigns are successful. But these cons are mitigated by the consumer base and brand value that is developed and the valuable feedback the company receives.