Crowdfunding tapping the right crow
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Crowdfunding tapping the right crow
Crowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow 5This version: July 9, 2013AbstractWith crowdfunding. an entrepreneur raises external financing from a large audience (the “crowd”), ill which each individual provides a very small amount, instead of soliciting a small group of sophisticated investors. This article compares two forms of crowdfunding Crowdfunding tapping the right crow : entrepreneurs solicit individuals either to pre-order the product or to advance a fixed amount of money in exchange for a share of future profits (oCrowdfunding tapping the right crow
r equity). In either case, we assume that “crowdfunders” enjoy “community benefits” that increase their utility. Using a unified model, we show that tCrowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow wise. Our conclusions have implications for managerial decisions in the early development stage of firms, when the entrepreneur needs to build a community of individuals with whom he or she must interact. We also offer extensions on the impact of quality uncertainty and inft uniat ion asy minet ry.J Crowdfunding tapping the right crow EL classification codes: G32, LU. L13, L15, L21Keywords: crowdfunding, pre-ordering, profit sharing‘The authors are grateful to Gavin Cossar (the editCrowdfunding tapping the right crow
or), Pcgarct Pichler, Marco Sahin, three anonymous reviewers, and seminar and conference participants in Antwerp, Atlanta, Bologna, Brussels, Ceigy-PoCrowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow eir helpful comments on previous versions of this article. A preliminary version of this paper was previously circulated under the title "Crowdfunding: An Industrial Organization Perspective'*.’University catholiquc de Ixtuvain, CORE and lyouvain School of Management. B-1348 Louvnin-la-Ncuve, Belgiu Crowdfunding tapping the right crow m, Paul.Bellefiammetluclouvain.be. Other affiliation: CESifo.’University catholiquc de Louvain. Louvain School of Management, B-1348 Louvain-ln-Ncuve,Crowdfunding tapping the right crow
Belgium, Thomas.Lambert4hiclouvmn.be. Other affiliation: University Lille Nord de Rance SKEMA.’‘University Lille Nord de Rance SKEMA (University LillCrowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow maryIn recent years, crowdfunding has become a valuable alternative source of funding for on trepreneurs seeking external financing. Existing empirical analyses report an impressive growing volume of money collected through crowdfunding worldwide. Crowdfunding allows cntrcprcnciưs to raise funding t Crowdfunding tapping the right crow hrough an open call on the Internet. An important characteristic is the extra private benefits that funders (i.c. “crowdfunders") enjoy by participatiCrowdfunding tapping the right crow
ng in the crowdfund iug mechanism. TheiHC additional private benefits vary with the forms of crowdfunding, ranging front an expiily-laisexl model, proCrowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow e economic factors (hat determine an entrepreneur’s choice of a J>arl icnlar form of crowdfunding.This article is I lie- first to address entrepreneurs choice’ in a theoretical model. it edlers a coniỊMirison eif two forms eif crowdfl Hiding that dominate' the scene? nowadays: pn’-eirde-ring and pro Crowdfunding tapping the right crow fit sharing. In the first form, entrepreneurs invite? consumers to pre-order the1 product, to collect, the? necessary capital for launching productionCrowdfunding tapping the right crow
. The pre-ordering scheme? e?nable?s the entrepreneur to price discriminate between two groups of consumers (“crowdfundcrs”, who prepurchase the produCrowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow second form of crowdfunding, entrepreneurs solicit individuals to provide money in exchange for a share of future profits or equity securities. In this profit-sharing scheme, the investors may or may not decide to consume the product at a later stage.In both forms of crowdfunding, we assume that cr Crowdfunding tapping the right crow owdfunders enjoy some additional utility over other regular consumers. As we illustrate with real-world examples, crowdfunding is most often associateCrowdfunding tapping the right crow
d with community-based (?x|M?rienccs that general.!? “community be-nelits" for participants. The nature of these community benefits varies with the? fCrowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow ce under the profit-sharing mechanism.We find I hat Illis dilferenc!' in I he form of extra fiencfits is crucial ill shaping t he en-I repreiiriirial choice of crowdfunding mechanism. We find that when till' initial capital requirement. is relatively small entrepreneurs prefer the presordcring mecha Crowdfunding tapping the right crow nism, but prefer the profit-sharing mechanism otherwise?. The model derivation offers the following intuition Is’hind this re?sult. Pro-ordering enablCrowdfunding tapping the right crow
es the entrepreneur to pric<‘ discriminate between crowdfimders and other consumers. Yet, as capital iKX’ds increase, the entrepreneur is forced to diCrowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow rimination bex-ome’s e?xex?s»ive?, such that the profitability e>f the? crowdfunding initiative- elex:n?ase8 significantly. Conversely, crowdfunding based on profit sharing lMxx»m Crowdfunding tapping the right crow uals to participate in the financing with little effect on the fraction of profits that he or she needs to give up to obtain financing.Building on thiCrowdfunding tapping the right crow
s tradeoff, this article also provides insights into information asymmetries between entrepreneurs and crowdfunders. First, the model highlights that,Crowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow entrepreneur uses pre ordering as a screening device that induces consumers to reveal their willingness to pay by self selecting for pro ordering. Second, in an extension wo introduce additional forms of uncertainty. One form involves the uncertainty about the true quality of the product, which may Crowdfunding tapping the right crow only be known after production has taken place. We show that this form of uncertainty leads to qualitatively similar results. The other form is inforCrowdfunding tapping the right crow
mation asymmetry. which arises when entrepreneurs know the product quality better than the crowd. In general, information asymmetry tends to favor proCrowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow s to screen consumers and induce them to pre-order the product than when he or she tries to attract investors who eventually may not consume the product.Our theoretical analysis offers managerial and empirical implications for the optimal design of crowdfunding initiatives, the impact of capital req Crowdfunding tapping the right crow uirements, product type and market size, and the need to build the “right” community of crowdfunders. To the best of our knowledge, none of the empiriCrowdfunding tapping the right crow
cal predictions have been tested so far.3Electronic copy available at: https://ssrn.com/abstract=15781751 IntroductionIt is well recognized that new fCrowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow ell. 1995; Cassar, 2004; Cosh Ct al., 2009). Many entrepreneurial ventures remain unfunded, part ly because of a lack of sufficient value that can be pledged to financial investors and partly because of unsuccessful attempts to convince investors (Casamatta and Haritchabalct, 2011; Chen ct al., 2009 Crowdfunding tapping the right crow ; Hellmann. 2007; Kirsch Ct. ill., 2009; Shane and Cable, 2002). To circumvent these problems, creative founders have recently employed a new source oCrowdfunding tapping the right crow
f finance so-called crowdfunding by tapping the “crowd” instead of specialized investors. Crowdfunding helps entrepreneurs adopt new approaches of undCrowdfunding: Tapping the right crowd*Accepted for publication in Journal of Business VenturingPaul Belleflamine1 Thomas Lambert* Annin Schwienbacher5 Crowdfunding tapping the right crow ore closely involved in these firms, as active consumers, investors, or bot h.The concept of crowdfunding is rooted in the broader concept of crowdsourcing, which refers to using the crowd to obtain ideas, feedback, and solutions to develop corporate activities (Baylis, 2013; Howe, 2008: Klccmann et Crowdfunding tapping the right crow al.. 2008). In the ease of crowdfunding, the objective is to collect money for investment, generally by using online social networks. In other words,Crowdfunding tapping the right crow
instead of raising money from a small group of sophisticated investors, crowdfunding helps firms obtain money from large? audiences (the “crowd"), inGọi ngay
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