Crowdfunding: Tapping the right crowd☆
Section snippets
Executive summary
In recent years, crowdfunding has become a valuable alternative source of funding for entrepreneurs seeking external financing. Existing empirical analyses report an impressive growing volume of money collected through crowdfunding worldwide. Crowdfunding allows entrepreneurs to raise funding through an open call on the Internet. An important characteristic is the extra private benefits that funders (i.e., “crowdfunders”) enjoy by participating in the crowdfunding mechanism. These additional
What is crowdfunding?
Our objective in this section is to provide insights into the various crowdfunding practices. We first provide a general definition of crowdfunding. We then present selected crowdfunding initiatives. We close this section by providing a review of the related literature.
Uncertainty about product quality
Because crowdfunding initiatives involve the introduction of new products and services, they occur in environments in which uncertainty and information asymmetries are prevalent. However, crowdfunding initiatives often rely on products that are not yet on the market in finished form. Furthermore, many times, entrepreneurs only offer a description and promise on what the final product will be.
Thus far in our analysis, there was no uncertainty, and asymmetric information was only present on the
Discussion and implications
In this section, we discuss several issues surrounding crowdfunding that we have not properly addressed so far; we also derive empirical and managerial implications from our theoretical results.
First, in our context, crowdfunding consists of a mix of operating and financing decisions. On the one hand, it is a financing decision, because the entrepreneur needs to raise money for production and thus compares the cost of capital of the different forms of crowdfunding. On the other hand, it is an
Concluding remarks
This article sheds light on managerial implications of crowdfunding practices used for entrepreneurial activities. It stresses the need to build a community that ultimately enjoys additional private benefits from participation to make crowdfunding a viable alternative to investor- or creditor-based funding, such as through banks, business angels, or even venture capital. In setting up the initiative, the entrepreneur potentially faces the following tradeoff. Crowdfunding allows for price
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The authors are grateful to Gavin Cassar (the editor), Pegaret Pichler, Marco Sahm, three anonymous reviewers, and seminar and conference participants in Antwerp, Atlanta, Bologna, Brussels, Cergy-Pontoise, Copenhagen, Ghent, Groningen, Hong-Kong, Lille, Louvain-la-Neuve, Mannheim, Montpellier, Munich, Nice, Paris, Prague, Porto, and Taipei for their helpful comments on previous versions of this article. A preliminary version of this article was previously circulated under the title “Crowdfunding: An Industrial Organization Perspective”.