FACULTY AND RESEARCH

This paper investigates sources of risk-taking in "reward-based" ("pre-purchase") crowdfunding campaigns. While crowdfunding helps entrepreneurs to obtain feedback on market demand (next to raising money), it may lead to project discontinuation if not enough money is raised during the campaign. This often leads entrepreneurs to raise more money to minimize project discontinuation. This effect is exacerbated when there is a risk that the idea is quickly replicated by others, leading to even higher fundraising goals but also to fewer projects offered on platforms. Conversely, the presence of professional investors (business angels, venture capitalists) reduces the entrepreneurs' incentives in their crowdfunding campaign, in part "crowding out the crowd" from the platforms, and thus affecting risk of failure. The optimal funding structure turns out to be a co-investment model that combines the crowdfunding and professional investors, supporting the notion that crowdfunding can complement rather than substitute existing investors.