It's neither. Not every investment has to be in exchange for equity.

Here, check this out: http://www.kickstarter.com/projects/1804944614/the-sutro-mis...

Look at the number of backers at the $6 reward level, at that level all you get is a postcard, the equivalent of a pat on the back or a firm handshake. Yet 29 people pledged that amount or chose that reward level. Also, look at the total backers vs. the sum of all the backers at each reward level, you get a difference of 30 people (170 vs. 140). 30 people who either kicked in a mere dollar or two or who chose not to receive a reward. That's at least $200 in funding with almost no return to the backers, a full 2% of the overall funding goal. And the 2 higher levels of rewards are similar, a $20 poster, a $30 t-shirt. There's another thousand dollars, 10% of their goal level, just with that.

Why?

The answer is that economics turns out to be a lot more complex than we've been led to believe. The ideal of the efficient and ruthless economic model human being, Utilitus Maximus, is a myth. Economics meshes with culture and society and they play off of and interact with each other. Here we have about a hundred folks who are willing to collectively chip in $1200 for a project that they believe in. Is this charity? Not in any conventional sense, there are no sick or hungry children here, just bicycles. But people are willing to support projects which bring about slight changes to the world, even if it's just introducing a new product, which advance their ideals or enthusiasms. And that's a very substantial indirect benefit even if there is no direct benefit. Ultimately transforming the world around you into the world you want to live in can be the best and most effective use of your money.

More than anything I think that's the flame which fuels the growing popularity of kickstarter.

The benefit for project owners, who are not always startups, is validation of the marketability of their concept, a pool of early adopters, up front cash of course, but also a more intimate connection between makers and enthusiasts. A while ago the singer Jonathan Coulton did an experiment where he forced himself to come up with a new song every week, which he debuted on his blog. Afterward he collected the best songs together and released an album. Similarly, a few years ago Markus Persson, aka "Notch", created an early prototype of an innovative PC game and he decided to put it out there into the hands of folks all over the internet and charge a relatively small fee for preorders of the full game when it would become available. As he iteratively developed the game, Minecraft, in full public view eventually it hit a point of critical mass and gained a huge amount of interest, and with it a large volume of pre-orders. He made so much revenue via pre-orders that he was able to found a game studio, hire several other developers, and even begin development of other games, before Minecraft even officially launched. To me that sort of heavily customer focused bootstrapping process seems very much of a kind with kickstarter. It's very much an extension of the new modes of business that are possible today due to the internet, due to social media, due to the ease of doing business without any middlemen other than the bank and UPS.

Granted, even on a simplistic level kickstarter still makes economic sense (makers take a profit, backers receive products of significant utility), but the higher order effects are interesting too.

There are alternatives out there, most of them are fairly similar. Soon there will be alternatives that support equity based investments. To my mind the biggest alternative is just to do it yourself. For some projects it doesn't make sense, but for a lot of projects it can be easy to incrementally bootstrap your way up the revenue/product development chain.