Crowdfunding via Revenue-Sharing Contracts

Abstract

Problem definition: We analyze a new model of crowdfunding recently introduced by Bolstr, Localstake, and Startwise. A platform acts as a matchmaker between a firm needing funds and a crowd of investors willing to provide capital. After the firm is funded, it pays back the investors using revenue-sharing contracts, with a prespecified investment multiple (investors will receive [Formula: see text] dollars for every dollar invested) and a revenue-sharing proportion, over an investment horizon of uncertain duration. Academic/practical relevance: We analyze the revenue-sharing contract approach to crowdfunding, and we assist the firm to determine its optimal contract parameters to maximize its expected net present value (NPV) subject to investor participation constraints and platform fees. Methodology: A natural multiperiod formulation for the firm’s problem results in an intractable stochastic optimization model, which we approximate using a deterministic model. In the approximation model, we use a cash buffer for dealing with cash flow uncertainties; we are able to solve the approximation model analytically. Results: Parametrized on real data from Bolstr campaigns, our approximation solutions give an NPV in the stochastic problem that is within 0.2% of the simulation-based optimal NPV for all levels of cash flow uncertainty. We compare revenue-sharing contracts with equity crowdfunding and observe that the former result in higher NPVs and comparable bankruptcy probabilities. We also compare revenue-sharing contracts with fixed rate loans and find that, for most cases considered, revenue-sharing contracts provide a higher NPV and a lower probability of bankruptcy than a fixed rate loan. We also show that these benefits are more significant for firms with higher levels of cash flow uncertainty. Managerial implications: Revenue-sharing contracts are a novel approach to crowdfunding, and we show that are superior to other financing models.