Groupe d’études et de recherche en analyse des décisions

G-2020-48

A model of early-stage finance

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In recent years, we have witnessed a mini-revolution around early-stage financing. In some places, like the UK, more money is raised on Equity Crowdfunding (ECF) platforms than by angels and VCs combined. In this paper we provide a simple theoretical framework for early-stage financing. In particular, we examine how the decision of the entrepreneurs to opt for equity crowdfunding instead of funding with angel investors -- who add value but take more equity -- affects the failure rate of a startup and its future value. We show that for startups where there may be little a priori support, because, for example, the entrepreneurs are inexperienced or because the idea is very different from anything out there, a successful ECF campaign can result in a significant increase in value. We specify the general conditions that determine whether entrepreneurs are better off opting for angel investments or for an ECF campaign as a function of various parameters, including the wisdom (or lack thereof) of the crowds.

, 17 pages