Raising Capital Under Demand Uncertainty

Abstract

Does security-based crowdfunding create economic value, and how? Which economic participants would find this method of financing attractive? What is the optimal capital-raising process in security-based crowdfunding platforms? To answer these questions, we study the capital-raising problem of an entrepreneur of an innovative product, when future demand is uncertain and market participants have access to costly and imperfect information. Under the optimal contract, investors take their backing decisions sequentially and financing goes through only if enough investors back the project. We show that if the ability of economic participants to commit is limited, raising capital via a security-based crowdfunding platform can alleviate under-financing of creditworthy projects.

Keywords: Information Aggregation, Crowdfunding, Learning, Uncertainty

JEL Classification: D82, D83, G32