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(R)evolution in Entrepreneurial Finance? The Relationship between Cryptocurrency and Venture Capital Markets

Kirill Shakhnov and Luana Zaccaria
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Kirill Shakhnov: University of Surrey
Luana Zaccaria: EIEF

No 2202, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: We propose a model of entrepreneurial finance where start-ups raise capital via Initial Coin Offering (ICO) or traditional funding methods such as Venture Capital (VC). While token sales allow startups to leverage network effects, VC's value-adding services enhance product quality. We show that, even when projects have large potential network effects, ICOs may not be optimal if entrepreneurial ability is low. Moreover, despite the potential complementarity between network effects and value-adding services, entrepreneurs combine VC and ICO funding only in highly efficient VC markets and for projects with high network effects. Using data on funding rounds of blockchain startups, we empirically validate the main results of the model.

Pages: 42 pages
Date: 2022, Revised 2022-01
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-ent, nep-fdg, nep-pay, nep-ppm and nep-sbm
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