Crowdfunding: raising money from strangers

January saw the recorded music industry announce another set of grim figures while waving a white handkerchief. An International Federation of the Phonographic Industry report showed that the growth of digital music halved over 2010, with its chief executive, Frances Moore, stating that digital piracy remains the biggest threat to the future of creative industries.

But away from the crumbling of traditional structures that have for decades supported musicians, film-makers et al, there's been a feelgood story brewing online that suggests that our enthusiasm for giving money in exchange for creativity has far from disappeared. Crowdfunding is a modern spin on the ancient system of patronage, and the polar opposite of file-sharing; if we're fond of what someone's doing, we give them some cash. Sometimes we get something in return, but more often it's just for the karmic glow of having helped a project to come to fruition.

A small number of artists were ahead of the curve in realising how online communities could provide alternative sources of cash. British rock band Marillion were unlikely trailblazers, and they have made a number of fan-funded albums at a time when major record labels have deemed them too unfashionable. Other creative fields inevitably followed; Franny Armstrong's highly regarded climate change film The Age of Stupid completed its five-year production process in 2009 after the £450,000 budget had been raised from 223 individuals and groups. Now, designers, journalists, coders and cartographers are all getting in on the act, their task having been made easier thanks to a number of websites that streamline and legitimise the fundraising process.

Slicethepie and Sellaband were pioneers that aimed to launch the careers of young musicians, and they've since been joined by start-ups such as PledgeMusic and My Major Company (MMC). Meanwhile, sites such as Feed the Muse and RocketHub have broadened it beyond music to any kind of creative project. But the biggest noise is being made by Kickstarter. Launched in April 2009, Kickstarter's rise to the top of the pile has been assisted by a number of high-profile projects, all attracted by its low commission rate (5 per cent) and its promise to keep its nose out of the creative process. Diaspora, the open-source alternative to Facebook currently being built by a group of American students, received $200,000 via the platform, while MNML, a design company looking for funding for its kits to transform the iPod nano into a multitouch watch, has now collected almost $1m.

But behind these headline-grabbing figures are a huge number of smaller projects that are seeing the light of day thanks only to crowdfunding. Marc Fields is a documentary film professor at Emerson College in Boston; his grant for a film about the history of the banjo dried up some $25,000 short, and, although reluctant to do so, he was persuaded by his brother, Jason, to turn to Kickstarter. "He was sceptical that anyone would care," Jason recalls. "But we received over $46,000 from over 500 donors – and suddenly TV networks who were originally lukewarm about the film are now calling Marc up. It's completely changed his perception of what social media can achieve."

French experimental film-maker Vincent Moon, known for his work with REM and Tom Jones, is similarly evangelical about using the platform. "For years, my work has been based on that same kind of spirit – the kindness of strangers. Kickstarter's ethos fits very well with that – and also with the way people create things nowadays. That DIY, one-to-one approach."

Kickstarter, like many of its online cousins, works on an "all or nothing" system. You set a funding target: if you reach it, the money is released; if you fail, it's returned. You encourage donors via a sliding scale of incentives, depending on their generosity; it could be a signed version of the finished product, a private concert, a trip with the artist in a hot-air balloon – the only limit is imagination. This completely transparent model ("This is what I need, this is why I need it, this is what's in it for you") has been crucial to Kickstarter's success, but the bigger story is the goodwill shown to artists at a time when we're constantly told by the music and film industries that we don't value music and film highly enough.

Isabel Monteiro is the singer of Drugstore, a band who found themselves cut adrift after chart successes in the 1990s; they're now recording a new album after fans donated via PledgeMusic. "We signed to a small independent label," she says, "but people were telling us that they wanted to help, too. So there's a 50-50 arrangement; the label pays for the practical things, and the fans' money pays for other essentials like transport and food. But we quickly realised that this thing is way beyond money; it's about people wanting to be part of the project."

This fundamentally changes the nature of the relationship between artist and audience. In modern times, people have always paid for products or tickets, with some of that money trickling back to the artist (at least in theory). But now, the middlemen can be cut out of the equation. Critics of crowdfunding think of this as slightly vulgar: do those who contribute to the project somehow "own" the artist – especially when the rewards on offer can involve personal meetings? Monteiro disagrees, and relishes the direct relationship that has transformed her band from being a remote, 2D presence into something more tangible. "It becomes more meaningful for both sides," she says. "Obviously there's a line that's drawn, and the fans know where that line is. They know they don't have shares in the project or influence over it, but still they donate. It makes me cry when I think about it."

My Major Company describes itself as "a record label with fan funding at its core", and its CEO, Paul-René Albertini, has held top positions at Polygram, Sony and Warner Music. MMC sets a target of £100,000 for each band, which is then used to record and promote an album; when it's released, the band gets 20 per cent of the profits, the fans get 30 per cent and the rest goes to the company. Doubters have raised a quizzical eyebrow at the figures; with the business of making and promoting music in such massive flux these days, is £100,000 really necessary? Is that money merely supporting old music-business structures that are on their way out? And why involve a company in your band's development when Kickstarter could get you the money and stay out of your hair?

MMC, for its part, says that it's about helping artists with their eyes on the charts to compete at the highest level, and this puts it at the other end of the scale to Kickstarter's projects, which could be perhaps seen as "take the money and run". So far, two bands have reached their magic £100,000.

A crucial part of MMC is the stake that donors have in the commercial success of a project, something that with Kickstarter and PledgeMusic is almost by the by. But sourcing small investments from hundreds, if not thousands, of people via the internet is a legal minefield – a fact quickly discovered by Darren Westlake, managing director of Crowdcube, a company launching in two weeks to offer fledgling businesses access to crowdfunding. "Myself and an FSA [Financial Services Authority] specialist came up with a number of different models," he says, "but one by one they were all knocked down for one reason or another. Finally, we managed to come up with one that everyone is happy with, and it's going to give us all the chance to put small sums in small businesses. There's no real way of doing that at the moment; we're really about democratising investment."

It's perhaps a logical extension of the crowdfunding model: businesses making products that solve problems will be able to appeal directly to the people they're aiming to help. Music and art, of course, don't solve problems. It's emotional responses that realise so many projects on websites such as Kickstarter, and each one makes for a fascinating and heart-warming tale.

Of course, raising that money and completing those projects is far from guaranteed, and fraught with problems that we rarely get to hear about. Despite a clutch of celebrity endorsements, three crusading teenage film-makers are still seeking funds for their production of Jules Verne's Clovis Dardentor at buyacredit.com, and while fingers are crossed for news of any developments on the website's blog, you can't help but wonder what will happen if they fail. But failure's not always a bad thing. Kickstarter's "all or nothing" model essentially allows creators to fail early, fail often, and keep on trying for that project that strikes a chord with the public. And, crucially, not once do they have to plead with a man in a suit.