Crowdfunding: Tapping the Right Crowd

Abstract:     
The basic idea of crowdfunding is for an entrepreneur to raise external finance from a large audience (the "crowd"), where each individual provides a very small amount, instead of soliciting a small group of sophisticated investors. The entrepreneur uses her social networks and established platforms on the Internet to directly interact with the crowd. The paper compares two different forms of crowdfunding: individuals are offered either to pre-order the product, or to advance a fixed amount of money in exchange for a share of future profits. In either case, "crowdfunders" are rewarded by "community benefits" that increase their utility. Using a unified model, we show that the entrepreneur prefers pre-ordering if the initial capital requirement is relatively small, and profit-sharing otherwise. Our conclusions have implications for managerial decisions in the early development stage of firms, since the entrepreneur needs to build a community of individuals with whom she must interact.

Number of Pages in PDF File: 34

Keywords: crowdfunding, strategic fundraising, social environment, ties formation, pre-ordering, profit-sharing

JEL Classification: G32, L11, L13, L15, L21

working papers series