Does Crowdfunding Benefit Entrepreneurs and Venture Capital Investors?

Volodymyr Babich (), Simone Marinesi () and Gerry Tsoukalas ()
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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

Manufacturing & Service Operations Management, 2021, vol. 23, issue 2, 508-524

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.

Keywords: crowdfunding; entrepreneurship; venture capital; operations and finance interface; double-sided moral hazard; bargaining games (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (14)

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