There's a very relevant and well-put article on Jeff's blog about funding for indie game development. The summary is this: the situation looks bleak. On most platforms, financially survivable options are surprisingly narrow. And yet AAA games are trending towards larger budgets and banking on blockbusters, which means there's very little room for "risky" development.
The article also addresses a recent proposal by Gabe Newell of Valve: public funding for games. Basically, instead of starting with publishers, the game begins with funding from the games community, that can choose what kind of games get developped and potentially get a return on their investment. Jeff doesn't think this sounds like a particularly viable option, pointing out, among other things, that if every player is an investor, they may have legal rights relative to the developer that would get, well, messy.
In my opinion, the public funding idea is really interesting, but it seems like the wrong part of it is getting emphasized - if I put down $50 for a cool game idea to be developed, it's not because I'm hoping for a return on my investment, it's because I want the game to be made! That's giving me my $50 of value - I don't also need to get my money back two years later (from what, selling copies to the fans...the one who provided the money to create it in the first place?)
The way to make an idea like this more viable is to focus on the part where players want cool games and are theoretically willing to pay to have them. Here's my variant: pre-pre-ordering. The idea is very simple, and similar to what was proposed above - players want to see cool games made, so they're willing to put down money to have them made, but trying to make it a standard investment relationship is messy, so instead they put down money just to own the game when it's made, on the condition that it actually does get made.
That is, the game developer comes up with a cool idea, maybe some concept art/writing/prototype mechanics, and presents them to the potential players. If the players want the game to be made, they basically agree "I will buy this game if it is made" (which is legally binding, like saying you'll pay for an item on ebay is). Now if a sufficient amount of "potential" funding is raised to make the game, then the players' credit cards are charged, and production begins. If not, then the players keep their money. Of course, once the game is completed, those who pre-pre-ordered get sent a copy without having to pay again.
There is still a question about what happens if a developer fails to deliver a game. In theory they would have to return as much of the money as they can, but it's theoretically impossible for them to return all of it, and this only needs to happen a few times for players to become disillusioned with the system. An alternative setup is that the players aren't charged anything until the game is actually released - in this case, the pre-pre-orders are used to secure immediate funding from another source (and in theory, it should be easy to do so if you're guaranteed a certain amount of revenue).
The second question is, do players who pre-pre-order get some kind of say in the development of the game? Generally speaking, I don't want players to be making major design decisions (for that matter, I don't want publishers making major design decisions), but I do think the model would benefit from giving players a vote in certain aspects of development. This could also be something that costs extra: you can pre-pre-order at the basic cost of purchasing the game, or offer more to be able to vote on community decisions, get guaranteed access to beta testing (or even alpha testing), get your name in the credits, etc.
So that's the idea, minus a marketable name.