Crowdfunding: Tapping the Right Crowd

45 Pages Posted: 12 May 2011 Last revised: 2 Jul 2014

See all articles by Paul Belleflamme

Paul Belleflamme

CORE/LIDAM, UCLouvain (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., Available at SSRN: https://ssrn.com/abstract=1836873. or http://dx.doi.org/10.2139/ssrn.1836873

Paul Belleflamme (Contact Author)

CORE/LIDAM, UCLouvain (Université Catholique de Louvain) ( email )

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

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Thomas Lambert

Rotterdam School of Management, Erasmus University ( email )

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Rotterdam, 3000 DR
Netherlands

HOME PAGE: http://www.thomaslambert.org

Erasmus Research Institute of Management (ERIM) ( email )

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3000 DR Rotterdam
Netherlands

Armin Schwienbacher

SKEMA Business School ( email )

Avenue Willy Brandt
Euralille, 59777
France

HOME PAGE: http://sites.google.com/view/armin-schwienbacher

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