Crowdfunding is the process by which entrepreneurs, inventors, artists, and other creators allow would-be customers to help fund a project in its early stages. Sites like Kickstarter and Indiegogo facilitate this process, collecting money from participants so that the project being crowdfunded can use that capital to build the product they've 'pitched'. Typically, different rewards are offered to different contribution amounts, and timelines are outlined for when the products will be delivered to those that helped fund the project.
Crowdfunding builds on the effectual concept of gathering equity and leveraging your existing networks/connections. Many of the most successful crowdfunding campaigns have been held by companies or creators that already have significant followings. These fans can then invest in the new product or project that the team is crowdfunding. Campaigns are particularly successful when they already have a prototype or convincing demo videos.
In essence, crowdfunding allows you to sell a product that doesn't exist yet to consumers who are willing to pay for it. It's an excellent form of testing demand without incurring too much personal risk for the entrepreneur bringing their product to market.
Crowdfunding, like any other source of capital, can go exceptionally well and still end in a company that flops. Being on the hook for delivering reward packages to everyone that contributed to a campaign can put a young company in a very challenging situation, and many crowdfunding campaigns meet their funding goals but do not deliver their product on time.
If you're hoping for less external responsibility, you might consider our next method of funding.