Kristina Dell
4 September 2008

Got $10? Then you too can be a venture capitalist.

Politicians do it. Charities too. And now for-profit entrepreneurs are tapping the Internet to get small amounts of money from lots and lots of supporters. One part social networking and one part capital accumulation, crowdfunding websites seek to harness the enthusiasm--and pocket money--of virtual strangers, promising them a cut of the returns.

Like a homespun IPO, helps hoi polloi bankroll upstart fashion designers. British documentary filmmaker Franny Armstrong raised more than £450,000 ($815,000) to finance--and work full time on--The Age of Stupid, which she hopes will premiere at the Sundance Film Festival in January. People who gave 20 quid ($35) got a credit on the film's website; those who gave £5,000 ($9,000) and up will get a percentage of the profits, if there are any.

The term crowdfunding derives from another neologism: crowdsourcing, i.e., outsourcing to the public jobs typically performed by employees. Want to start a T-shirt business? Why not have the masses submit designs (crowdsourcing) and finance the ones they like (crowdfunding)? That's what is doing, in a fashion-forward knockoff of which generated $17 million in revenues in 2006 by having the crowd choose T-shirt designs. "If you put money down to support a design, that's a strong indicator of actual demand," says Cameesa founder Andrew Cronk, a programmer in Chicago. In other words, the folks who fund your venture double as a first-rate focus group.

Likewise, connects music lovers with unsigned artists looking to record albums. It's a way to bypass the labels; groupies can now fill that role. Musicians have profiles with bios and songs, and as soon as they sell 5,000 shares, at $10 a pop, it's time to head to the recording studio. In two years, more than 30,000 people have ponied up more than $2.5 million, and 25 musicians have cut or are cutting albums. So far, the average return on each $10 investment is about $2.50 from CD sales and ads. The money gets split among the artist, SellaBand and the artist's "believers"--an apt description for those who contributed. "People become emotionally invested as part of a team," says Mark Maclaine, bassist in the British band Second Person, which in six months raised $50,000 from 741 investors and has since had its video featured on VH1 UK and MTV UK. "Right now things are going really well," says Maclaine, who is warily pursuing music full time. "Maybe I'll be working in Wal-Mart in a few months." But at least 741 people are betting he won't be.