Types of investment
Reward crowdfunding explained
By Michael Trudeau
Article 4 of 4
Reward crowdfunding explained
All you need to know about how reward crowdfunding works, the benefits and pitfalls, and how to get involved.
Getting a return on your investment doesn't always mean cash going into your bank account.
The chance to get your hands on a unique product, be given an opportunity to get involved in a project, or to receive a credit for your financial backing can have more appeal.
This is where reward crowdfunding comes in. Companies looking to raise money for a creative project can offer you a different kind of return - a reward of some kind.
This guide explains how reward crowdfunding works, the benefits and pitfalls, and how to go about it.
What is reward crowdfunding?
There are literally thousands of creative projects listed on reward-crowdfunding websites, funding everything from films and new gadgets, to video games or music bands.
Startups set an amount they want to raise, and your reward can depend on the amount you contribute. For example, if you were putting in money to fund a feature film, you could get a t-shirt, memorabilia, an invite to a premiere or a producer credit, depending on how much you invest.
However, it could take months, or even years, to see a reward paid out - if at all.
There are four main reward-crowdfunding websites operating in the UK:
- Kickstarter funds creative projects where a specific thing, such as a film, game or book, will be made.
- Buzzbnk concentrates on socially motivated ventures, such as environmental and educational projects.
- Indiegogo lists a wider range of projects - from documentaries and films to funding for a memorial park bench.
- Crowdfunder follows a similar model to Indiegogo.
On all sites, schemes might need anything from a few hundred pounds to hundreds of thousands to get going.
How reward crowdfunding websites work
Crowdfunder and Kickstarter use 'all or nothing' funding models. If the startup's desired financial target is reached, the project goes ahead; if it doesn't, investors get their money back.
Buzzbnk refunds your investment if the project doesn't reach its first target, which can either be a proportion of the amount it hopes to raise, or the grand total if no milestone is set.
While Indiegogo has the capacity to refund investors if a project doesn't meet its financial goal, almost every entrepreneur pays a fee to take advantage of the site's 'flexible funding' model, which allows them to keep all the money raised even if they fail to raise the total amount.
Am I protected?
Should the worst happen - and most crowdfunded projects fail - you're unlikely to get your money back or receive your reward.
Because the incentives to investors on reward-crowdfunding sites aren't financial products, they don't need to be regulated and you won't have access to the Financial Services Compensation Scheme (FSCS) should things go wrong.
If you have a problem with a project, you won't be able to complain to the Financial Ombudsman Service (FOS). And the crowdfunding site you invested through is unlikely to help, as they encourage users to direct complaints to the companies in which they invested.
- Last updated: February 2016
- Updated by: Michael Trudeau