Reward-based crowdfunding and venture financing

Abstract

Innovative activities play a fundamental role in increased productivity and economic growth that benefits consumers, businesses, and the economy. As a natural consequence, economic literature has a long history of documenting the optimal allocation of resources towards innovative activities and R&D. A widely recognised issue in the literature is that entrepreneurial firms engaging in innovative activities are either too difficult or costly to finance in a freely competitive marketplace because of capital market imperfections. As a result, venture capital has specialised in reducing information frictions between investors and the firm, thus bringing down investment costs. However, academic findings show that venture capital is quite limited in its approach, and often, professional investors rely on a couple of firms to succeed in their portfolios.

During the last decade, reward-based crowdfunding has emerged as a novel method that enables entrepreneurs to raise capital directly from consumers. The growing importance of crowdfunding has led to academic interest in the topic. In this thesis, I conduct a literature review and present recent economic papers on the topic to assess whether reward-based crowdfunding can improve entrepreneurial companies' outcomes. The literature review compares economic theories to empirical evidence in the field to understand the benefits that reward-based crowdfunding brings to the table. Based on my research, both theoretical and empirical papers seem to be generally aligned on the key benefits of crowdfunding. Interestingly, financing itself seems to be of secondary importance, and, in literature, crowdfunding’s primary benefit relates to the opportunity it provides for entrepreneurs to test products and learn about consumer preferences before committing costs to production.