The Crowdfunding Effects on Venture Capital Investment

Abstract

We examine the impact of crowdfunding on venture capital (VC) investments in the presence of competition among VC firms. Our economy consists of a startup, a crowdfunding platform, and two VC firms, each holding their own perceptions about the startup's potential. The startup seeks equity funding from the VC firms and decides on the size of the equity offer. If the VC firms decline to invest, the startup turns to crowdfunding. After the crowdfunding, all the firms update their beliefs on the startup's success based on the crowdfunding outcome, and the VC firms revisit their investment decisions, now with a smaller equity offer if the crowdfunding outcome was a success. We show that when crowdfunding is an option, the VC firm that is more optimistic about the startup's prospects often leans towards postponing their investment. However, competition among the VC firms reduces this incentive to delay. We compare scenarios with and without the option of launching a crowdfunding campaign and analyze how the crowdfunding option affects the equity offer the startup provides, the investment amount the startup obtains, and the profitability of the startup and the VC firms. By analyzing the key factors that play a role, such as the competition between the VC firms, we provide insights into the interactions between crowdfunding and VC investments.

Keywords: crowdfunding, public information, venture capital, competition