PEBBLE, a watch that displays messages from the wearer's iPhone, may not be a record-holder for long. The $10.3m raised last month from 68,929 people after Pebble's inventors posted a pitch on Kickstarter, a “crowdfunding” website, dwarfed the previous high of $3.3m set in March by Double Fine Adventure, a video game (see chart 1). Until February, no project had raised $1m. Now seven have. This “feels like an inflection point”, says Yancey Strickler, a founder of Kickstarter, a site where anyone with an idea can ask the crowd for small sums of money that, added up, can bring it to fruition. Crowdfunding is booming. A report by Massolution, a research firm, forecasts that $2.8 billion will be raised worldwide this year, up from $1.5 billion in 2011 and only $530m in 2009 (see chart 2). There are over 450 “crowdfunding platforms”, including four in China, up from under 100 in 2007, with Kickstarter America's largest. This month Indiegogo, its closest rival (though global and with a broader mix of projects), secured the biggest chunk of venture capital so far for crowdfunding. The effect of this has perhaps been most marked in the creative arts: around 10% of the films shown at the Sundance and Cannes festivals this year were crowdfunded, says Mr Strickler. Charity is benefiting, too. But America's recent Jumpstart Our Business Start-ups (JOBS) Act is raising hopes that crowdfunding will also transform the way in which firms raise capital. Duncan Niederauer, the boss of NYSE Euronext, claims that, properly done, it “will become the future of how most small businesses are going to be financed”. Is the hype justified?

From fad to finance Talk of crowdfunding as a short-lived fad has largely ceased, as evidence mounts that lots of people value personal engagement with projects they help to finance. “People increasingly want humanity with their technology,” says Caterina Fake, an early investor in Kickstarter. Hitherto people have opened their wallets for three main reasons: “caring about the person or company; wanting the product; or being part of a community,” says Slava Rubin, a founder of Indiegogo. Adding profit as a motive will bring fresh challenges. Raising money from strangers requires a lot of effort to gain their trust. One indicator of credibility is “social proof”: projects that can raise 20-40% of their target amount from online “friends and family” do far better at getting strangers to contribute, says Mr Rubin. Videos also help. Campaigns with them raise over twice as much as those without. Then, at least in the absence of a financial profit, there are the perks projects offer. These can range from “psychic rewards” such as being mentioned in a film's credits to more tangible benefits: Emmy's Organics, a firm singled out by Barack Obama when he signed the JOBS Act, tempted punters with promises of baked goodies.

Crowdfunding is well suited to industries that create intellectual property, says Hal Varian, Google's chief economist. Instead of today's approach of restricting access to content using copyright, crowdfunding facilitates an alternative, whereby the creator agrees to provide content if enough people commit themselves to paying for it. Mr Varian argues that this overcomes the free-rider problem, a particular pain for makers of online content because it can often be reproduced at zero cost.

Google has experimented by crowdfunding the development of new fonts for websites, at around $3,000 a time. It is a good way to test consumer demand, says Mr Varian. Mr Rubin expects more big companies to use crowdfunding, extending the recent trend for “co-creating” products with customers. GM, say, might crowdfund different tweaks to its vehicles, to see which ones customers want. Firms could let staff seek crowdfunding for their ideas and offer a top-up if they hit a target.

For big companies, raising money matters less than gaining information about customers or even good PR. For many smaller firms, money matters most. A small Main Street business trying to borrow $50,000-100,000 “cannot get that money from any bank in this country right now,” says Mr Niederauer. CircleUp, a new firm that raises equity for small business from a restricted crowd of sophisticated “accredited” investors (rather than the general public), sees a huge funding gap for firms with revenues of under $10m in industries such as consumer products. Since its launch in April, CircleUp has already beaten its targets for this year.

But what if firms could raise money from anyone? Fred Wilson, a prominent venture capitalist, calculates that if Americans used just 1% of their investable assets to crowdfund business they would release a $300 billion surge of capital. But will regulators, who worry about Joe Sixpack being ripped off by unscrupulous fund-raisers, allow the crowd in? The Securities and Exchange Commission (SEC) is trying to come up with rules to implement the JOBS Act. Some fear that it will impose onerous requirements on firms raising equity from the crowd.

Crowdfunding firms differ on the merits of this. Kickstarter has decided not to confuse its mission by adding the profit motive. “In Congress, everyone said the JOBS Act would mean Kickstarter for start-ups. But we are not going to do it,” says Mr Strickler. Indiegogo, by contrast, is keen. Prosper, a peer-to-peer lending firm, is undecided. SeedUps, an Irish start-up, is developing a three-tiered crowd—accredited investors; friends and family; and everyone else—to be ready for a launch in America once the SEC's new rules take effect. In Britain, Crowdcube enables people to deploy up to £5,000 ($7,758) before having to register as sophisticated investors. In similar spirit, the JOBS Act tries to protect the public by limiting their investment in crowdfunding.

Fears of fraud may be overdone. Crowds may be harder to cheat than individuals. “On eBay, to sell something fraudulently, you need only fool one person. On Kickstarter, you have to fool a couple of thousand,” says Mr Strickler. Robert Litan of the Kauffman Foundation, a think-tank, believes experts will be able to add “proof of concept” to social proof. Perhaps leading venture-capital firms will return to financing baby start-ups, which they long ago abandoned. They would boost crowdfunding if, say, they lent their reputations to young firms and promised to invest later if they met certain targets. With so much promising experimentation in the works, Mr Litan says, “let's just hope the SEC doesn't kill it off before it gets started.”

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