124 / 2024-04-21 12:01:27

The role of venture capitalists in reward-based crowdfunding

Game theory, Reward-based crowdfunding, Entrepreneurship, Venture capitalists, Double-sided moral hazard

Most entrepreneurs seek VC funding after the reward-based crowdfunding campaign succeeds, and venture capitalists (VCs) can contribute to the project in two aspects: investment (funding) and operational expertise (effort). With a game theory model, we find entrepreneurs face twelve possible scenarios contingent on the project revenue and revenue share, including six scenarios in which both sides won’t exert efforts to complete the product project. To avoid the six scenarios and to ensure the project profitability, entrepreneurs should set funding goals in feasible zones, and we show the optimal goal will be the lower bound for its corresponding feasible zone. Moreover, there exists three intervals of the revenue share for entrepreneurs, and each interval corresponds to a specific feasible zone of the funding goal, and to a unique role (loaner, owner or partner) VCs play in the project. If the share is less than a lower threshold, VCs invest with no incentive to exert effort, like the bank financing (loaner); if the share is more than a higher threshold, entrepreneurs won’t follow up the project but transfer it to VCs (owner); if the share stays medium, entrepreneurs or VCs would participate into the product development (partner). In the extension, we consider the revenue share an endogenous and further analyze the role of VC investors. We notice VCs prefer to own the whole project and obtains all profits from mass market, while the entrepreneur treats the inefficient VC investor as a loaner, and the efficient ones as a partner. In addition, the entrepreneur is more likely to enlarge her share as the project revenue increases.