Financing Efficiency of Securities-Based Crowdfunding

Abstract

We analyze early-venture fundraising from dispersed, endogenously informed investors. An entrepreneur chooses a payoff-maximizing offering, and investors communicate their information by either contributing capital or by abstaining. The entrepreneur uses the information conveyed by fundraising amounts to decide whether or not to undertake a risky venture. His decision threshold hedges investors against bad projects, creating a "loser's blessing'" that encourages contributing without information. Making the offering less attractive to investors mitigates the loser's blessing but can give rise to a winner's curse. Both tensions lower the information content of fundraising amounts and reduce financing efficiency.

Keywords: Crowdfunding, Loser's Blessing, Venture Finance, FinTech

JEL Classification: G10, G18, G24, G28