The real appeal of crowdfunding

Crowdfunding sites--the best example being Kickstarter--are changing how creative projects and products get funded. The Ouya Android game console has already received $4.8 million in funding with 24 days to go. The Pebble E ink Bluetooth watch, which set a funding goal of $100,000, finished its funding with $10.3 million. Screenwriter Charlie Kaufman and "Community" creator Dan Harmon are looking for funding for "Anomalisa," a stop-action animated film, and are at $171,000 of their $200,000 goal with 56 days to go. "The Canyons," a movie written by Bret Easton Ellis and directed by Paul Schrader, received $159,000 in funding and surpassed its $100,000 goal.

Many observers misunderstand the appeal of crowdfunding. They believe that it's a quasi-charitable activity: People contribute money, and other people use that money to create things. It's true that most projects have $1 pledge levels--what I call "hearty handshake" pledges--where the person making the pledge usually gets little more than the satisfaction of helping the project along. However, the vast majority of pledges are at a level where the supporter actually gets something of value--a CD of music, a DVD of the movie, a copy of the book, or one of the products being developed. In many cases, supporters get those items at a discount from what they would pay if the project succeeds and they simply buy it at retail.

There are some crowdfunding sites that do work on a quasi-charitable level to raise money for personal expenses, such as tuition and medical expenses. However, they don't raise a lot of money: GiveForward, for example, has raised $17.7 million for personal expenses as of this writing, while Kickstarter is closing in on $300 million raised.

The real appeal of crowdfunding is to buy something that doesn't yet exist. Keep that in mind if you launch a crowdfunding project--people don't want to fund your idea, they want to buy your product.