6. Concluding remarks
This article sheds light on managerial implications of crowdfunding practices used for entrepreneurial activities. It stresses the need to build a community that ultimately enjoys additional private benefits from participation to make crowdfunding a viable alternative to investor- or creditor-based funding, such as through banks, business angels, or even venture capital. In setting up the initiative, the entrepreneur potentially faces the following tradeoff. Crowdfunding allows for price discrimination. In the case of pre-ordering, the capacity to optimally implement price discrimination between pre-ordering consumers (the crowdfunders) and other consumers may, however, be constrained by the amount of capital the entrepreneur needs to raise to cover the up-front (fixed) costs. Whenever this amount exceeds some threshold, the distortion in price discrimination becomes excessive, in which case the profitability of the crowdfunding initiative is reduced. For larger amounts, crowdfunding based on profit sharing or equity issuance becomes more worthwhile for the entrepreneur when community benefits are associated with the decision to finance the entrepreneurial project. This is because larger amounts help the entrepreneur induce more individuals to participate in the financing without affecting the fraction of profits he or she needs to give up to obtain financing. Finally, we offer insights into how quality uncertainty and information asymmetry affect this tradeoff.
