Crowdfunding sites are the smart new way to raise finance but how do you work out which projects will succeed?

Crowdfunding sites like Kickstarter take an all-or-nothing approach to success and failure

An idea with wings: the Ostrich Pillow was a Kickstarter success story

When "Superwoman" signs up to something, you know that an idea has taken off. Especially when the Superwoman in question is financier Nicola Horlick.

Earlier this year, she raised £150,000 in less than a day, to set up a film-financing company via a crowdfunding site, a place that connects online backers with would-be creators. No wonder her latest venture, revealed this week, is – you guessed it – a crowdfunding site, Money&Co, which will launch next year. She'll have a way to go to catch up with the reigning king of crowdfunding, Kickstarter, though, which celebrated a year of business in the UK on Monday. In those 12 months, more than £22.5m has been pledged to projects in this country, with £17.1m going to successful self-starters.

While it's no doubt that Kickstarter has had a huge impact in the run up to its first birthday, and that crowdfunding is the hip new way to raise capital, there's that little matter of £5.4m. You see, Kickstarter takes an all-or-nothing approach to success and failure. If a project reaches its fundraising target, it is considered successful and if it doesn't, even if it is just £1 (or $1, given the site's American roots) off its target, then it has failed and no money can be taken.

Of course, in real-life things aren't so clear-cut, but there are quite a number of those all-or-nothing failures; 56.13 per cent of all projects "fail" on Kickstarter (which is about the same rate across all crowdfunding websites). But Kickstarter doesn't index these failed projects – that is, they are hard to find both on search engines and on the site itself. Why? According to Kickstarter's communications team, this is because the creators of such projects don't want their failed projects popping up when you search for their name and requested that they be de-indexed from Google. But this doesn't explain why you won't find failure on Kickstarter's main pages. Surely this information would help, not hinder, other project creators?

"It's not so much that Kickstarter hides failure but it's not easy to find," says Vincent Etter, a researcher from the School of Computer and Communication Sciences in Lausanne, and co-author of Launch Hard or Go Home!, a paper on ways to predict whether a Kickstarter project will succeed or fail. "Kickstarter wants to make money, right? It seems that its thinking is that success promotes success."

Dig around the site beyond the landing pages and you can find some of the projects that didn't take off. Project failures are hard to predict from just looking at them. In the "that's never going to work" category is PetTread, a treadmill for cats and small dogs, made from a big wheel stuck in a box, which claims to be "the next step forward in pet health".

The project creator did not reach his $110,000 target. But then there's "Ostrich Pillow Light" – a face-obscuring pillow that resembles a thick snood, for snoozers on the go, it looks very, very odd, and seems just as implausible as a hamster wheel for your cat, yet it has well-surpassed its £28,000 goal with funds of £68,378 and counting. Its big brother, the "Ostrich Pillow" (pictured above), was also funded on the site and is now available to buy. It looks even more daft, but that hasn't stopped its success, not least because it garnered press coverage thanks to its oddity factor (and the fact that everyone loves a nap, right?).

According to Etter, the success or failure of such projects can been predicted within four hours of them launching. He and his fellow researchers are, apparently, correct 76 per cent of the time. "The projects that succeed tend to ask for less money," says Etter.

In fact, the sweet spot is between $5,000 and $10,000, which Kickstarter does advise project creators to bear in mind in its Kickstarter school, an online tutorial on how to obtain backing. What it doesn't do is offer after-care. Its model also doesn't allow for when projects receive their funding and then founders aren't happy with what is produced. In Kickstarter's model, it's up to the creator to be transparent and communicate changes as they go along and to set realistic funding goals.

Code Crawler blocks failed to take off

But creators don't always stick to this advice. "It's not always clear cut," says Etter. "There is a whole new dimension, that you back the project and it has technically succeeded but then they never deliver. That is much harder to predict... for example there was a father who designed a board game – The Doom that Came to Atlantic City – with his kids as a weekend project and got $600,000, and now he has to make hundreds of thousands of these board games and he obviously wasn't prepared for that."

Another example is CLANG, a sword-fighting video game apparatus that was technically "successful" ie it raised it's monetary goal on Kickstarter, but wasn't what funders wanted; there is no game and development has been put on hold.

Amanda Boyle, CEO of UK-based crowdfunding site Bloom VC, says failure can be instructive and takes the opposite tack from Kickstarter by including projects that have failed in her site's "Hall of Fame". She also assigns a mentor to every person who creates something on the site, so they are advised on how to pitch and what investors expect from them.

Investors get angry when the project creators don't do what they've said they'll do and don't offer a proper explanation, says Boyle, and those are the kinds of projects that "succeed" but fail in investors' eyes, but as long as the creators are transparent about the process, investors are usually forgiving.

"Of course creative projects change along the way. On our site, we see a lot of feedback from funders and a lot of projects get altered because of that feedback. From our research, we know 30 per cent of people who put collateral in don't want the physical rewards," she adds, "and often the reward can be intangible, like being an exec on a movie – it's about allowing people to be part of the story."

Criticism really can be key to success where crowdfunding is concerned. A recent example of a project that failed hard is film director Spike Lee's plea for money to fund a film about human beings who are addicted to blood. After an initial panning, Lee read the comments, changed his pitch to make it more detailed and set clear goals. After those changes, the project reached its funding goal. If only he'd seen more examples of failure, he might have known what to do from the start.

So, Nicola, if you want to make your site a force to be reckoned with, make sure you big-up failure as well as success.

Which products hit their funding targets?

"Code crawlers" – building blocks engraved with computer code for toddlers FAILED

A US actor whose front teeth were knocked out made a video on Bloom VC asking for $3,500 to pay for dental work FUNDED

A Kickstarter start-up for a TV show about Kickstarter start-ups FAILED

A set of playing cards with designs inspired by the Sherlock Holmes novels, asking for $30,000 on Kickstarter FUNDED

Tip Flops – toe-separating flip flops that lets your nail polish dry while you're walking about FAILED