Reward-Based Crowdfunding vs. Initial Coin Offering

Abstract

In recent years, there emerge some new financing techniques as additional financing options for the entrepreneurs, especially for those, such as start-ups, that ordinarily faced difficulties in accessing the traditional financing techniques. Among these new techniques, reward-based crowdfunding (crowdfunding) and the initial coin offerings (ICOs) are the two most popular strategies. In this paper, we build a stylized model to investigate how the product characteristics affect the entrepreneur's financing choice between crowdfunding and ICO. We show that ICO (resp. crowdfunding) is more suitable for intangible (resp. tangible) products that typically have high (resp. low) fixed costs and low (resp. high) production costs. This result is built off of their different fundraising mechanisms. Under crowdfunding (resp. ICOs), the fundraising is through sacrificing the profit in the funding stage (resp. both funding and market stages). Moreover, speculators can be a double-edged sword to ICOs. On the one hand, the participation of speculators can increase the financing success rate of ICOs. On the other hand, the competition from speculators in the token transaction market will hurt the entrepreneur. We also show that ICOs become more preferable than crowdfunding in the presence of the R\&D failure risk. Finally, we examine the setting with endogenous product quality and show that ICOs lead to higher product quality than crowdfunding when the startup cost is low, or when either of the platform traffic and the production cost is high.