There are a handful of success stories in the startup scene, some of which are now big names like Google, Dropbox and Instagram. However, not everyone can have angel investors and venture capitalists backing up their projects. Some companies choose to bootstrap their projects with their own money or funds from another enterprise. Some even borrow from relatives, friends or fund their startups using a credit card.

For those who do not have seed funds to finance their creative projects, one good source of funding may come from potential customers around the world. But how do you sell something before it even exists? One way is by asking for support in small amounts through crowdfunding.

Crowdfunding websites enable entrepreneurs and creative artists to fund their projects from pledges from backers from around the world. Most setups will only require backers to actually pay money once the minimum total pledge is met, which means only projects deemed to be commercially viable will actually be financed.

While crowdfunding started as a way to pre-sell products or seek donations, the 2012 Jump-Start Our Business Startups (JOBS) act relaxed some of the restrictions around raising equity from online investors.

Seeking funding for your business? Here's how crowdfunding can help.

An Introduction to Crowdfunding

The term "crowdfunding" came from the concept of crowdsourcing, which involves sourcing any material or idea from the community.

This material can be knowledge, which is the main concept behind wiki-based encyclopedias like Wikipedia, or news, which is the concept behind news-submission sites like Reddit. Crowdsourcing can also be used to answer questions, which is the concept behind sites like Yahoo! Answers or Quora.

Open-source software is also an excellent example of crowdsourcing, although this applies to a more close-knit community of developers and contributors. However, the concept is the same: contributors pitch in, and the end result is a bigger and more beneficial product than what each contributor could have made on his or her own.

Crowdfunding works the same way. In a way, it involves asking contributors for donations, although crowdfunding gives the backers a better return on their contribution, which can be in the form of actual products, perks, rewards or being listed in the finished product’s credits.

Popular crowdfunding services include names like KickStarter and IndieGogo although there are literally dozens of other sites that cater to niche crowds. (See for example the list on quora.)

How Crowdfunded Projects Work

Crowdfunding allows individual contributors to come together online, allowing entrepreneurs to access a bigger pool of potential backers worldwide.

An entrepreneur or creative project manager will list the proposal as an entry into a crowdfunding website, along with a description, rationale and proposed benefit of the project. The entrepreneur will also inform contributors about what they'll receive in return for their donations.

For example, an entrepreneur can propose to build a smartphone accessory and list a purchase price of $5 as the minimum contribution. The entrepreneur can also list higher amounts, which will include better perks, such as a customized accessory, improved packaging, engraving, faster shipping or even special mention in the credits, if the product is actually a service or a work of art.

The public is then asked to make pledges to the project. The crowdfunding site takes the pledges as orders or proposed payment toward the product.

Why a Goal Needed to Meet Funding?

Crowdfunded projects work best when there is a minimum threshold or amount. This way, the entrepreneur can only receive the pledged money if the project reaches a certain amount in pledges. This protects both the entrepreneur and the buyer. The entrepreneur is only obligated to build and ship the product if there is enough money to initiate and sustain the first batch of orders. The users who pledge money are assured that they will only be billed if the entrepreneur can actually build, package and ship the product.

What Kind of Projects Can Be Crowdfunded?

Any project can be financed through crowdfunding, although most projects that receive this type of funding are creative. For example, crowdfunded projects in the tech realm often include innovative inventions like a smartphone casing, watches that can be synced with smartphones, storage expansion for notebook computers, and even high-tech toys.

Creative works of art can also be crowdfunded. For example, independent movie-makers can finance their production through crowdfunding in exchange for DVD copies of the movie, or for "executive producer" credits. Literary authors can ask for pledges in exchange for copies of their published work.

The possibilities for what kinds of projects can be funded are endless, and are only limited by the restrictions and policies of an individual crowdfunding site.

Success Stories (and Failures)

Crowdfunding can involve anywhere from a few hundred dollars to thousands. One of the most successful stories is that of the Pebble Watch, which fetched $10.27 million through KickStarter in April of 2012. The Pebble is a customizable watch that synchronizes with smartphones. After failing to woo traditional investors, the Pebble Technology launched a drive on KickStarter with a goal of just $100,000. The final amount of funding raised was 10,266 percent of the company's original goal! At the time, it was the most successful campaign that KickStarter had ever supported.

Another similar KickStarter project was the TikTok touchscreen watch, a kit that allowed users to turn an iPod Nano into a wristwatch. The project got $942,000 in funding in 2010, which was well over the company's $15,000 goal.

Other areas of interest also have their respective success stories. These include the record, art, book and tour by independent musician Amanda Palmer, who got $1.193 million in funding from a $100,000 goal, while the Crania Anatomica Filigre figurine by Joshua Harker got $77,271 in funding, with an priginal target of just $500.

While success stories like these have turned into high-profile case studies, many entrepreneurs don't reach their funding goals through crowdfunding. VentureBeat has estimated that this group accounts for a bout 41 percent of the campaigns on KickStarter.

Fortunately, not all crowdfunding efforts require meeting a goal. IndieGogo, another crowdfunding site, allows partial funding, which means the entrepreneur or project starter can still get the money even if the goal is not reached 100 percent. As such, this crowd-funding website is popular for charitable causes and donation requests.

A notable example is the fundraising campaign for Petra Anderson, who survived the July 2012 shooting in Aurora, Colorado, and required surgery and treatment for multiple gunshot wounds. The campaign targeted $250,000 in 45 days, and was a flexible-funding campaign. As such, the project starter gets to receive the money regardless of whether the campaign reaches its goal. However, this campaign did manage to exceed its goal, raising more than $265,000 before it closed.

How to Increase Your Chances of Crowdfunding Success

Not everyone gets to succeed in crowdfunding efforts, but there are a few tips for entrepreneurs, artists, charitable institutions or other creative project starters who want to give it a try.
  1. Design and describe your project to grab attention and generate interest. Multimedia such as photos and videos can help.
  2. Consider your timing. VentureBeat has determined that the most successful projects set a deadline of 38 days on average, compared to projects that fail, which have an average deadline of 43 days.
  3. Set realistic funding goals. According to VentureBeat, successful KickStarter projects have an average goal of $5,487, while failures have an average goal of $16,365.
  4. Pick the right kind of project. The most-funded projects on KickStarter so far are artistic ones, like independent movies, books and music. Gadget accessories are a close runner-up, especially given the popularity of mobile devices like notebooks, tablets and smartphones.
  5. Market your project like crazy through other media such as social networks, blogs, word of mouth and even mainstream media if you can get attention there. The more people you reach, the more likely you are to reach your funding goal.
Crowdfunding is a unique way for entrepreneurs, artists and others to raise funds. But like any other type of fundraising, what really determines the success of a fundraising campaign is the project it's designed to fund. So start with a great idea and see where it takes you.