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Does Crowdfunding Benefit Entrepreneurs and Venture Capital Investors?

Author

Listed:
  • Volodymyr Babich

    (McDonough School of Business, Georgetown University, Washington, District of Columbia 20057)

  • Simone Marinesi

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Gerry Tsoukalas

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract
Problem definition : We study how a new development in entrepreneurship—crowdfunding—interacts with more traditional financing sources such as venture capital investors (VCs) and bank financing. Academic/practical relevance : Although extant literature has mainly focused on predicting crowdfunding campaign outcomes and optimal campaign design, the broader questions of how crowdfunding affects entrepreneurs and how crowdfunding platforms fit in with traditional startup financing sources, such as banks and VCs, have received relatively little attention. Methodology : We model a bargaining game with a moral-hazard problem between an entrepreneur and a bank, and a double-sided moral-hazard problem between the entrepreneur and a VC with respect to their noncontractible efforts. Results : We decompose the economic value of crowdfunding into cash gains or losses, costs of bad investments avoided, and project-payoff probability update. This economic value is generally shared between entrepreneurs and investors, benefiting both. Moreover, crowdfunding can help to overcome the agency problems. However, crowdfunding can also harm the entrepreneur and the VC. Competition from other investors reduces value to VCs, who may walk away from the deal entirely. This can hurt entrepreneurs who lose out on valuable VC operational expertise (operational support, access to supplier networks, etc.). Managerial implications : The model provides a theoretical underpinning for recent empirical observations that some projects lose VC financing after successful crowdfunding campaigns. Our results complement earlier studies in operations management by demonstrating that the entrepreneurs’ objectives are more complex than simply maximizing the payoffs from crowdfunding campaigns.

Suggested Citation

  • Volodymyr Babich & Simone Marinesi & Gerry Tsoukalas, 2021. "Does Crowdfunding Benefit Entrepreneurs and Venture Capital Investors?," Manufacturing & Service Operations Management, INFORMS, vol. 23(2), pages 508-524, March.
    • Handle: RePEc:inm:ormsom:v:23:y:2021:i:2:p:508-524
    DOI: 10.1287/msom.2019.0835
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    2. Swati Gupta & Sahil Raj & Sanjay Gupta & Ajay Sharma, 2023. "Prioritising crowdfunding benefits: a fuzzy-AHP approach," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(1), pages 379-403, February.
    3. Anton Miglo, 2022. "Theories of Crowdfunding and Token Issues: A Review," JRFM, MDPI, vol. 15(5), pages 1-28, May.
    4. Yasar, Burze & Sevilay Yılmaz, Işıl & Hatipoğlu, Nurullah & Salih, Aslıhan, 2022. "Stretching the success in reward-based crowdfunding," Journal of Business Research, Elsevier, vol. 152(C), pages 205-220.
    5. Sun, Yanhong & Sheng, Yiyun & Yan, Shuai & Zhang, Wei, 2023. "Pricing strategies in reward-based crowdfunding: Whether to introduce price guarantee?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 170(C).
    6. Oh, Sebeom, 2023. "Market Manipulation in NFT Markets," MPRA Paper 116704, University Library of Munich, Germany.
    7. Damianos P. Sakas & Ioannis Dimitrios G. Kamperos & Panagiotis Reklitis, 2021. "Estimating Risk Perception Effects on Courier Companies’ Online Customer Behavior during a Crisis, Using Crowdsourced Data," Sustainability, MDPI, vol. 13(22), pages 1-26, November.
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    9. Damianos P. Sakas & Dimitrios P. Reklitis, 2021. "The Impact of Organic Traffic of Crowdsourcing Platforms on Airlines’ Website Traffic and User Engagement," Sustainability, MDPI, vol. 13(16), pages 1-22, August.
    10. Xu, Yang & Zhou, Qiang & Wang, Xu, 2023. "Joint price and quality optimization strategy in crowdfunding campaign," International Journal of Production Economics, Elsevier, vol. 263(C).
    11. Lv, Jiancheng & Bi, Gongbing & Xu, Yang, 2023. "Crowdfunding pricing and quality overstatement in the presence of platform regulation," Journal of Retailing and Consumer Services, Elsevier, vol. 70(C).
    12. Li, Qingying & Ma, Manqiong & Shi, Tianqin & Zhu, Chen, 2022. "Green investment in a sustainable supply chain: The role of blockchain and fairness," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 167(C).

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