Kickstarter: How crowdsourcing went mainstream

June 7, 2012, 4:43 PM UTC

FORTUNE — Matthew Lillard would like a dollar. Actually, the actor best known for playing Shaggy in the live-action Scooby Doo films would like $150,000. But he’d be happy if you gave him just one. Lillard is raising money on the popular website Kickstarter to fund his upcoming movie,
Fat Kid Rules the World

Of course, Lillard is not alone. To date, more than 20,000 projects have been hosted on the site since the New York City-based company’s 2008 launch. Kickstarter vets projects in advance (accepting about 75% of applicants) and hosts the campaigns, which can last up to 60 days, for free. The company only makes money if the campaign reaches its funding goal — at that time, Kickstarter receives 5% of the campaign’s take, and Amazon, which processes the credit card transactions also receives between 3 and 5% of each transaction.

Success has changed the site’s character dramatically. Once a community where individual inventors and indie artists sought out small sums to fund creative projects, Kickstarter has been transformed into a platform where companies post campaigns and rake in large amounts of money. Along the way, the company’s revenue scheme has also evolved. Early profiles of founder Perry Chen mention advertising and listing fees, but now the service is all about the points. According to 
The Crowdfunding Bible
 author Scott Steinberg, Kickstarter may find well-backed and aggressively marketed ventures to be more attractive. “Those have the best ability to raise awareness and generate dollars, a percentage of which goes into their pocket,” he says.

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In fact, the site’s two top-grossing campaigns were launched by established professionals and angel-backed companies. In March 2012, a video game project called Double Fine Adventure was posted by well-loved industry veterans and pulled in $3.3 million. The new record holder, the Pebble E-Paper Watch, reportedly had $375,000 in angel investments before kicking off its campaign last month. And of the $10 million that it raised, Kickstarter earned $500,000. To date, people have pledged more than $175 million to projects on the site.

Though Kickstarter would not confirm it (they declined to participate in this story), there seems to have been an increase in technology projects on the site over the past six months, and Brian Lamb has watched closely as the site has changed. The developer of Swivl, an iPhone stand that rotates to follow users while they video chat, Lamb was rejected by the site when he tried to get funding in Fall 2010. Kickstarter didn’t clarify why it rejected Swivl, but Lamb thinks at that time the service had temporarily turned away from products to focus more on the arts. Instead, Swivl raised $24,000 with Kickstarter competitor Indiegogo, and began shipping its product two months ago.

In the meantime, Kickstarter accepted a similar product dubbed Galileo. The device’s slick promotional video was picked up by blogs all over the internet this past spring, and the project raised more than $700,000 in funding. It was developed by JoeBen Bevirt, a founder of Joby, the company that brought the popular Gorillapod line of flexible tripods to market. To date, almost 1,500 Swivls have sold, but when units were ready to ship, it had to compete with Galileo’s Kickstarter campaign for media coverage — even though the latter was only a prototype. “Until it actually ships, it’s vaporware,” Lamb argues.

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That may be true — as the high failure rate of tech products attests — but Lamb can’t argue with the numbers. Galileo out-raised Swivl by nearly 3000%, a success largely attributable to the marketing put into its campaign. Miami-based Max Borges Agency, which only represents technology products, has worked with around a dozen Kickstarter projects, including Galileo. In an effort to engage more crowd-funded clients, the agency has introduced creative pricing to help the cash-strapped projects pay for the publicity services. Depending on its confidence in the product, the firm may charge lower up-front fees, work for a percentage of the funds raised, or, in some cases, charge nothing at all — if the campaign’s goal isn’t met. Founder Max Borges views these clients as more challenging because they are not name brands and often have no have samples to send out to the press. “You’re really selling an idea and hoping that people are going to latch onto it,” he says.

And if the products do catch on, there are consequences. As Kickstarter grows in popularity and projects become more technical, product designers will sag under the weight of their promises. Instead of answering to a few venture capitalists, they’ll have to appease to a few thousand micro-financiers. Even the most light-hearted campaigns — like Power Laces, which raised $25,000 in an effort to build automatically tying shows like in Back to the Future — have seen delays with backers stomping their feet demanding updates. There is a reason Kickstarter’s projects were largely simple at first. Simple projects are easy to execute.

But it could be worse; the campaign could simply fail to hit its mark. With 8 days to go, it’s crunch time for Matthew Lillard — he still needs $28,000 to fund his project. Perhaps he should take a page from indie musician Amanda Palmer’s $1.2 million campaign playbook. For $10,000, she promised to invade the donor’s home, slather them in glam-rock makeup, take photos, feed them Thai food and get them drunk. Hey, if you saw Lillard’s work in Summer Catch, you’d know booze could only help.