Crowdfunding: Tapping the Right Crowd

Journal of Business Venturing, 2014, 29(5), 585-609

CORE Discussion Paper No. 2011/32

45 Pages Posted: 30 Mar 2010 Last revised: 2 Jul 2014

Paul Belleflamme

GREQAM; CORE and Louvain School of Management, UCL (Université Catholique de Louvain); CESifo (Center for Economic Studies and Ifo Institute)

Thomas Lambert

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)

Armin Schwienbacher

SKEMA Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 9, 2013

Abstract

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.

Keywords: crowdfunding, pre-ordering, profit sharing

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

Suggested Citation

Belleflamme, Paul and Lambert, Thomas and Schwienbacher, Armin, Crowdfunding: Tapping the Right Crowd (July 9, 2013). Journal of Business Venturing, 2014, 29(5), 585-609; CORE Discussion Paper No. 2011/32. Available at SSRN: https://ssrn.com/abstract=1578175 or http://dx.doi.org/10.2139/ssrn.1578175

Paul Belleflamme

GREQAM ( email )

Centre de la Vieille Charité
2, rue de la Charité
Marseille, 13002
France

HOME PAGE: http://www.paulbelleflamme.com

CORE and Louvain School of Management, UCL (Université Catholique de Louvain) ( email )

34 Voie du Roman Pays
POBox L1.03.01
B-1348 Louvain-la-Neuve, B-1348
Belgium
+32 10 47 82 91 (Phone)
+32 10 47 43 01 (Fax)

HOME PAGE: http://perso.uclouvain.be/paul.belleflamme/Site/Home.html

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Thomas Lambert

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

HOME PAGE: http://www.sites.google.com/site/lambertthom

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Armin Schwienbacher (Contact Author)

SKEMA Business School ( email )

Lille
France

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