The crowdfunding concept began a few years ago as a way for filmmakers, musicians, photographers and other artists to get funds – mostly from their select fan base – in order to pursue their creative work.

Over time, the concept of crowdfunding online has extended from the world of art to the domain of business and industry, largely owing to the popularity of strengthening social-media.

Crowdfunding – where and how?

In a rather difficult climate for raising resources, more and more emerging businesses are using crowdfunding sites to find cash online for starting up or even expanding. The money that they manage to raise through these platforms is generally less than $10,000. Investors usually are promised token compensation like free samples or coupons. However, that trend may perhaps be changing.

Websites like ProFounder are looking to facilitate much larger and more ambitious fund-raising campaigns. A report in The Wall Street Journal (Tapping the Crowd for Funds by technology writer Emily Maltby) points to the new trend. It draws attention to the fact that emerging entrepreneurs are reaching out to potential investors through the networking platforms and similar such sites to raise capital.

Niche crowdfunding sites

Channels like Twitter and Facebook have given a concrete shape to the idea, percolating to niche crowdfunding sites. One such platform, named Peerbackers, was launched in October 20110 to cater exclusively to emerging entrepreneurs. Its co-founder Sally Outlaw notes that the economy and the business needs combined with social media, now makes it possible for entrepreneurs to seek funding not easily available at the banks.

For example, Regan Wann raised over $4,000 in 45 days through RocketHub.com, another crowdfunding website launched early last year, to originally target artists. The money has enabled her to expand her Shelbyville, Ky. shop. Ms. Wann touted her initiative to potential customers, and then linked to it on her personal Facebook page as well as the blog.

Nearly 60 family members, friends, customers and some strangers contributed to it. They got a combination of gifts, on basis of the amount pledged. Recounting her experience, she revealed: “I didn’t know the kind of response (would be). Till the day I finally hit my goal, I thought I wouldn’t really make it. But the day I achieved it, I was very excited.”

A few things to keep in mind

• Most crowdfunding sites will hold the pledges till the goal is met. And if the campaign actually falls short at the deadline, funds are returned.
• The crowdfunding sites may carry a preliminary check to make sure that the business model is legitimate, but cannot be counted liable if it isn’t.
• They usually won’t enforce funds’ allocation or that supporters get their promised gifts. There are a few drawbacks to consider. Because the concept is new, not all people are comfortable with it. The financial backers face some risks too.
• There’s another caveat: success here is not guaranteed. Roughly half of the projects meet their goals. The rate may drop to as low as 25% for smaller businesses.