Kickstarter colour. (Kickstarter, 2012). Those who pledged $99 were

Kickstarter uses a reward model of crowdfunding. This is where backers
of a project receive a reward based on their contribution to the project. Before
setting up the venture, entrepreneurs will need to know how much money they
will need to raise. If they are not able to reach their goal, they don’t
receive the money. Backed
by 68,929 people who pledged $10,266,845, Pebble achieved
their goal of raising
$100,000 very easily. Pebble also needed to look at how they could reward the
people who contributed to the project. Backers were able to pledge from $1 to
$10,000. Everyone who backed the venture received a particular reward in return
which equaled their contribution. Those who donated $1 received exclusive
updates on the venture. Most (or 40,799 backers to be exact) pledged $115 which
got them one jet black Pebble watch. They were told that the watch would retail
for more than $150. Those who donated $10,000 received a ‘mega distributor
pack’ of 100 Pebble watches in their choice of colour. (Kickstarter, 2012).
Those who pledged $99 were also able to receive a jet black Pebble watch which
they were told would retail for more than $150. This gave them an incentive to
become early adopters and was probably one of the biggest reasons Pebble were
successful. 40,799 backers benefitted by pledging $115 to receive one of the
watches at lower price than they’d go on to retail for, becoming early adopters.
This meant that were getting the product earlier than others, but also at a
lower price. This reward model is used incentivize crowdfunding and through
Pebble we can see that it works. If backers do not receive a reward which they
feel is adequate, they will probably not look to back the venture.

In the internet era, entrepreneurs
are likely to use crowdfunding mostly for ‘cost-reduction reasons.’ (Schwienbacher & Larralde, 2010). Although reducing costs might seem to be one of the most obvious
ones, other key reasons come from the free attention they could receive, in
addition to support from backers for their project before launching a product
or service. The internet allows entrepreneurs to promote their ideas freely and
it also allows them to communicate with their customers through the use of
social media. (Schwienbacher
& Larralde, 2010).

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There are different crowdfunding models which
will each suit different backers. The reward model of crowdfunding allows ‘the
backer to pledge an amount of money for a reward, with structures tiered to
reward the largest backers to receive the highest value or most unique reward.’
(Wilkinson, 2017). The donation-based model of crowdfunding is
structured in a similar way to the reward model of crowdfunding, with one key difference,
the philanthropic element. People who are donating, don’t
expect to receive a reward in return. (Wilkinson, 2017). This model doesn’t fit
the ‘Pebble: E-Paper Watch for iPhone and
Android’ as backers will want a reward in return. The equity model of crowdfunding allows backers of a venture to
become a shareholder. With this model, ‘the potential returns are
significantly higher … but so are the risks.’ (Wilkinson, 2017).

 

Tung (2015) argues that although the reward
model of crowdfunding might seem to
be an ideal platform for start-up ventures, particularly those offering
tangible goods (such as, Pebble), ‘there are several drawbacks to this system,
especially to its backers.’ (Tung, 2015). Pointing mainly to the fact that
although backers of a venture are rewarded after it is successful in reaching
its target, backers ‘have no say in the company’s trajectory nor would they
share in the company’s future profits despite effectively laying the
foundations of its success.’ (Tung, 2015). This is one clear challenge of the
reward model of crowdfunding for backers. An equity model, used by platforms
such as Crowdcube, could be seen as a better option by the backers of a
venture. The reason being that ‘instead of fixed instant
rewards, backers are given a share of the company in return for their
contribution, effectively becoming investors.’
(Tung, 2015).  If a company goes on to do well,
backers who invest in companies (e.g. Pebble) through platforms such as
Kickstarter, who use a reward model of crowdfunding may want more in return.
They might want a share of the profits as they could feel that their investment
in the early stages was vital to the company’s success.