Raising Capital Under Demand Uncertainty

Abstract

We study an environment where an entrepreneur seeks capital to finance the development of a new product whose future demand is uncertain. We explore how the entrepreneur can capitalize on the information generated by potential investors. Under the optimal contract (i) investors take their backing decisions sequentially, and (ii) the project is financed only if it receives enough financial support; otherwise, the entrepreneur does not raise capital. Our work provides testable insights for security-based crowdfunding that help us understand its economic value and the conditions under which it can be a valuable method of financing.

Keywords: Information Aggregation, Crowdfunding, Learning, Uncertainty

JEL Classification: D82, D83, G32