Crowdfunding vs. Venture Capital : Complements or Substitutes? A Theoretical Assessment

Equity crowdfunding (CF) emerged as a new financing source for entrepreneurs and competes with early-stage financing professionals, e.g., venture capital (VC) investors. Entrepreneurs need to decide from who to raise capital and we develop a theory on this financing choice. We model two financing stages where both types of investors are in competition with each of them having competitive advantages. The respective advantages include transaction cost, return requirements, support quality, the efficiency of transaction monitoring and of abandonment decisions. Our model predicts the preferred choice for the entrepreneur contingent on these parameters, the resulting entrepreneurial effort and expected venture value. The model also suggests increased competition in the early-stage financial market and the necessity for VCs to focus on expertise, to specialize, and to move to later financing stages under certain circumstances