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Reward based financing models are used for financial models based on the act of giving money in exchange for a non-financial reward and often to support a cause. This could be a cause or project the contributor is directly related to and that is able to provide a small reward (community funding), but also any other product, project or cause that is directly supported by a group of individuals who receive a higher value product or service (crowdfunding).
In community funding the investors share a common project, space, entity or goal. Depending on the size of the community and funding needed, a digital platform may be utilized to realise the funding.
The most common form of reward-based community funding are donations for the benefit of the community that also benefits the individual investors. In this case a community is willing to invest in a common cause that benefits the community, but investors also expect a personal reward.
In crowdfunding, small amounts of money are raised from large amounts of people to fund a project or company. Those who invest choose where they invest in by themselves and may feel more engaged with the impact or revenue generated by the investment. Normally a digital platform is utilised to realise the funding.
Investors expect a tangible (non-financial) reward or product. The business or organisation receiving the investment utilises the funding to create the reward and get their operations off the ground.
This includes venture capital and bank financing but also any other funds made available by companies, charities, governments and family offices. Investments made by governments may increase confidence of other investors.
When investors seek to achieve specific non-financial goals they may issue impact bonds. These are debt instruments that may operate without interest. In impact bonds the investors take on the additional risk of a project, and the government payout after the project depends on its success. These can be measurable impacts or cost-savings.
Impact bonds are an ideal way to reduce the risk for the government by letting the market take on the risk of achieving success. Examples are green bonds, related to the sustainable energy transition, or social impact bonds, related to specific social goals. Normally these impact bonds are executed by large investors due to the complexity of the proposal and conditions.
Similar to crowdfunding, governments and NGOs that want to support a certain development, such as the rise of sustainable energy, may engage in reward-, or output-based funding. The funder can be paid back not with money, but for example with sustainable energy. This reduces the risk because no repayments are needed until the production stage is reached.
An example of this is the IDEA: the Spanish institute for energy diversification and saving. IDEA invests into a project and is repaid in units of produced sustainable energy. The monetary equivalent of every unit produced is deducted from the loan value until the full loan is repaid.[1]
In match funding, governments or other organizations match the funding generated by other investors. It can be done in all forms of capital but the most common forms of government involvement are grants, subsidies and guarantees.[2] Governments may also co-invest in a public-private investment fund which in turn invests in projects and businesses.
[1] CrowdThermal D3.2
[2] CrowdThermal D3.2
