Bargaining over crowdfunding benefits

Published date09 July 2018
Date09 July 2018
AuthorMarco Bade
Subject MatterStrategy,Entrepreneurship,Business climate/policy
Bargaining over
crowdfunding benefits
Marco Bade
Technische Universitaet Berlin, Berlin, Germany
Purpose Crowdfunding creates multifaceted benefits for different agents who all desire to extract some of
these benefits. The purpose of this paper is to analyze the allocation of crowdfunding benefits among
crowdfunders, entrepreneurs, and venture capitalists.
Design/methodology/approach The present paper develops a multi-stage bargaining model with a
double-sided moral hazard.
Findings It is demonstrated that higher entrepreneurial bargaining power vis-à-vis the crowd may not
always be beneficial for the venture. Most importantly, this is due to the reduced success probability of
crowdfunding resulting from higher bargaining power of the entrepreneur. Bargaining power and the value
of outside options determine the equilibrium allocation of crowdfunding benefits, expected venture value, and
thus expected wealth of all agents.
Practical implications Entrepreneurs face a tradeoff between venture quality gains and worse outcomes
from crowdfunding campaigns. Crowdfunding success and thus venture quality gains are the ultimate goal of
policy makers if they aim to enhance the overall social welfare.
Originality/value This paper is the first to investigate how multifaceted crowdfunding benefits are
allocated between the crowd, entrepreneurs, and venture capitalists. The paper furthers the development
of an appropriate regulatory framework for crowdfunding by depicting new and original effects related
to crowdfunding.
Keywords Venture capital, Entrepreneurship, Crowdfunding, Bargaining games, Crowdfunding benefits
Paper type Research paper
1. Introduction
Kickstarter launched in 2009 with the objective of enabling artists and other visionaries to
gain supporters for the realization of their ideas through what is called reward-based
crowdfunding. Immediately, entrepreneurs began tapping into reward-based crowdfunding.
In the business context, such crowdfunding campaigns address potential consumers
to test a new product or service and thereby evaluate the entrepreneurs idea. Essentially,
crowdfunding is a modified form of crowdsourcing which uses a large audience
(the crowd) to provide ideas and feedback to develop corporate activities (Howe, 2008;
Kleemann et al., 2008; Bayus, 2013).
In reward-based crowdfunding, funders receive rewards for backing a new venture. For
example, they appear in movie credits, or get the opportunity to collaboratively and
creatively engage in product development. Another typical form of reward-based
crowdfunding is pre-selling which allows funders to order new products before they are
put on the market (Mollick, 2014). Moreover, crowdfunding is regularly associated with
community-based experiences resulting from social interaction and participation in
crowdfunding platforms. This generates community benefits (Agrawal et al., 2014;
Belleflamme et al., 2014). Crowdfunders also derive consumption value from being a part of
entrepreneurial initiatives (Schwienbacher and Larralde, 2010), and belonging to a group of
early-stage adopters. These different forms of benefits create intrinsic or extrinsic
motivation for funders to participate in crowdfunding (Kleemann et al., 2008).
On the other side, there are the entrepreneur and most often investors, such as venture
capitalists, who also enjoy benefits from crowdfunding. These include, for example, access
to additional capital, multifaceted feedback, new ideas or food for thought, and inspiration
for new products or further product development (e.g. Agrawal et al., 2014). According to
Journal of Entrepreneurship and
Public Policy
Vol. 7 No. 2, 2018
pp. 166-177
© Emerald PublishingLimited
DOI 10.1108/JEPP-D-18-00009
Received 20 March 2018
Revised 9 April 2018
Accepted 9 April 2018
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