Financing under Demand Uncertainty


Crowdfunding allows entrepreneurs to raise funds by selling claims on future products to consumers before investment is sunk. Entrepreneurial moral hazard threatens this benefit of crowdfunding, as consumers face high monitoring costs and cannot prevent entrepreneurs from shirking. Venture capital funds have access to specialized monitoring technologies and can discipline entrepreneurs, but face asymmetric information about product demand. Crowdfunding creates a publicly verifiable signal about future product demand that facilitates venture capitalists screening of viable projects. By lowering monitors required rate of return and improving consumers’ prospects of receiving products, crowdfunding and traditional financing can serve as complementary funding tools. In this paper, I empirically investigate potential complementarities between crowdfunding and venture capital.

Work in Progress