Is Revenue Sharing a Myth in Kickstarter Campaigns?

Many creators and backers have a common question floating around in the world of crowdfunding: if a Kickstarter campaign is successful and generates a profit, is the backer entitled to a share of that profit?

Surprisingly, the answer is no. However, to fully understand this situation, it's essential to dive into the mechanics of reward-based crowdfunding, the mission of Kickstarter, and the principles behind equity crowdfunding.

The Nature and Goals of Kickstarter

Kickstarter, founded in 2009, is a reward-based crowdfunding platform with the core mission of bringing creative projects to life. Unlike traditional investment models, Kickstarter contributors, also known as backers, do not receive a financial return on their contributions. Instead, backers are given a range of pre-determined rewards depending on the level of their contribution. These rewards serve as an incentive for supporting the project, allowing contributors to experience or receive tangible benefits in return for their financial backing.

Understanding the Reward Structure

On Kickstarter, backers are presented with a multi-tiered rewards structure. The reward value increases with the amount contributed. The rewards offered can vary greatly, ranging from simple online acknowledgments to more substantial perks such as exclusive access to a project's development, early access to the final product, or unique experiences. Examples of these rewards might include:

A virtual high five and exclusive email list access to the project news A catering event for you and 100 friends with a 1000 food credit

It's important to note that these rewards are not conditional on the campaign's success or financial outcome. Backers automatically receive their chosen rewards, regardless of whether the project makes a profit.

The Contrast with Equity Crowdfunding

In the quest for potentially higher returns, some may turn to equity crowdfunding platforms such as WeFunder, NextSeed, StartEngine, and MicroVentures. Unlike reward-based crowdfunding, equity crowdfunding allows backers to become actual investors in the company. These platforms offer a chance for backers to earn a financial return if the company is successful. Investors in these platforms are entitled to a percentage of equity in the company, which theoretically could translate into a profit if the company thriving financially.

Investment Risks and Returns in Equity Crowdfunding

While the potential for financial gains exists, it's crucial to approach equity crowdfunding with caution. Startups and small businesses often struggle, and the failure rate is notably high. Additionally, the terms and conditions of investment can be complex and difficult to understand for non-experts. In contrast to Kickstarter, where backers have no stake in the company's financial success, equity crowdfunding participants might find themselves on the losing end if the business does not perform well.

Understanding the Regulatory Landscape

The landscape of crowdfunding has evolved significantly, driven by initiatives like the JOBS Act, which was signed into law by President Obama on May 16, 2016. The JOBS Act aimed to provide startups and small businesses with a wider range of fundraising options while expanding investment opportunities for the broader public. This has led to the emergence of both reward-based and equity crowdfunding platforms, each with its unique set of rules and regulations.

To navigate these waters effectively, it's important to stay informed about the latest regulations and platform-specific guidelines. Platforms like Kickstarter and Indiegogo focus on reward-based crowdfunding, ensuring backers remain uncompensated financially. Equity crowdfunding platforms, on the other hand, operate under more regulated environments that protect both investors and companies.

Conclusion and Final Thoughts

Crowdfunding continues to evolve, offering innovative ways for creators and businesses to raise funds. Whether through reward crowdfunding or equity crowdfunding, understanding the underlying principles and potential risks is crucial for success. If you're interested in diving deeper into the world of crowdfunding, feel free to reach out or connect with me on LinkedIn or Quora. Remember, the key to making the most out of crowdfunding lies in careful consideration and informed participation.

Carpe diem.