Crowdfunding Models: Donation-Based vs. Reward-Based

Written by Gene Wright. Posted in Uncategorized

In Part 1 of this series, the benefits of two crowdfunding models – lending-based and equity-based – were explored. Part 2 of this series looks at similar criteria for the remaining two models: donation-based and reward-based crowdfunding.

Donation-Based Crowdfunding

Crowdfunding is something charities, philanthropic organizations, and faith-based groups have done for generations. People contribute financially to an issue, a cause, or a project they believe in or are passionate about.

Many of these efforts are well known to us because they touch our souls. They are the charity drives we support annually, the church whose theology aligns with our own, or sometimes the way we express condolences. We might make a donation to a large association with lofty aims, or to small endeavors with sharply focused goals, such as an eating-disorders clinic for teenagers.

Why Choose a Donation-Based Model?

People will participate in donation-based crowdfunding because they have a personal stake in the organization behind the project, and they believe the project will benefit the community and the greater good. The return on their investment lies in their own personal sense of well-being.

Reward-Based Crowdfunding

Everyone who plays gets a prize. Of course, the prize has to have meaning to the player.

For example, a musician who has a strong regional fan base could raise funds for a new CD with a multi-level offer of rewards commensurate with a cash contribution, such as:

  • A $50 contribution could earn the right to vote on the CD song list;
  • $100 could earn concert tickets;
  • $500 could bring both of these plus a backstage pass.

Reward-based crowdfunding is a promise for future delivery of a specific good or service in exchange for financial support in the present.

Why Choose a Reward-Based Model?

People will contribute to reward-based crowdfunding because they feel a personal connection to the entrepreneur and the project, as well as being enticed by the non-monetary reward.

As you move forward into crowdfunding, a knowledgeable consultant can help you navigate the tricky process of capital generation and provide insight into which of the crowdfunding models – lending, equity, reward, or donation – is best for your business.