Funding New Ventures with Digital Tokens: Due Diligence and Token Tradability

25 Pages Posted: 7 Mar 2019 Last revised: 10 Mar 2019

See all articles by Yannis Bakos

Yannis Bakos

New York University (NYU) - Department of Information, Operations, and Management Sciences

Hanna Halaburda

Bank of Canada; New York University (NYU); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 20, 2019

Abstract

We study funding mechanisms for new ventures based on cryptographic tokens enabled by blockchain technology, such as initial coin offerings (ICOs). The infrastructure built around blockchain allows for efficient trading of these tokens. Thus the due diligence process can be crowdsourced beyond the potential early adopters, as favorable assessments of the venture can be leveraged with speculative token purchases exceeding the buyer's individual demand. We develop a model for an entrepreneur considering digital tokens to finance a new venture, focusing on token tradability and broader crowdsourcing of due diligence. We then compare funding via digital tokens with funding from traditional financing sources like venture capital as well as with pre-sale crowdfunding with non-tradable rewards.

We find that tradable digital tokens are more attractive when there is higher uncertainty about market demand, which is frequently the case when developing applications of new technologies, such as blockchain-based platforms. In such cases crowdsourcing due diligence benefits from the information contained in the private valuations of the early potential adopters. Token tradability leverages that information and increases the amount that can be financed, thus enabling new ventures with higher development costs. The increased funding comes at the cost of a lower digital token price and lower total profit for the entrepreneur, but may still be preferable to the alternatives, if such alternatives are available at all. This work makes a contribution to the emerging literatures on digital cryptographic tokens and on crowdfunding new ventures.

Keywords: ICOs, blockchain, due diligence, tradability, digital cryptographic tokens, economics of crowdfunding

JEL Classification: D8, G2, O3

Suggested Citation

Bakos, Yannis and Halaburda, Hanna, Funding New Ventures with Digital Tokens: Due Diligence and Token Tradability (January 20, 2019). Available at SSRN: https://ssrn.com/abstract=3335650 or http://dx.doi.org/10.2139/ssrn.3335650

Yannis Bakos (Contact Author)

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States
212-998-0841 (Phone)

HOME PAGE: http://www.stern.nyu.edu/~bakos

Hanna Halaburda

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Munich
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
97
Abstract Views
418
rank
266,978
PlumX Metrics