Crowdfunding: Tapping the Right Crowd
CORE and Louvain School of Management, UCL (Université Catholique de Louvain); CESifo (Center for Economic Studies and Ifo Institute)
UCLouvain; Université de Lille - SKEMA
Université Lille - SKEMA Business School
July 9, 2013
Journal of Business Venturing, 2014, 29(5), 585-609.
With crowdfunding, an entrepreneur raises external financing from a large audience (the "crowd"), in which each individual provides a very small amount, instead of soliciting a small group of sophisticated investors. This article compares two forms of crowdfunding: entrepreneurs solicit individuals either to pre-order the product or to advance a fixed amount of money in exchange for a share of future profits (or equity). In either case, we assume that "crowdfunders" enjoy "community benefits" that increase their utility. Using a unified model, we show that the entrepreneur prefers pre-ordering if the initial capital requirement is relatively small compared with market size and prefers profit sharing otherwise. Our conclusions have implications for managerial decisions in the early development stage of firms, when the entrepreneur needs to build a community of individuals with whom he or she must interact. We also offer extensions on the impact of quality uncertainty and information asymmetry.
Number of Pages in PDF File: 45
Keywords: crowdfunding, pre-ordering, profit sharing
JEL Classification: G32, L11, L13, L15, L21
Date posted: May 12, 2011 ; Last revised: November 2, 2014
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