Abstract:

This paper investigates the optimal funding choice for early-stage entrepreneurs, focusing on the decision between bank loans and crowdfunding. Using a two-period theoretical model, we examine scenarios where potential consumers self-select to fund the startup based on perceived product quality, without equity ownership. We then extend the model to include equity participation for crowdfunding, enabling crowd funders to receive shares in ventures with high capital requirements. In equilibrium, we find that crowdfunding is optimal when startup costs are low, while bank loans become preferable beyond a specific cost threshold. For significantly higher costs, equity based crowdfunding offers an alternative incentive mechanism to engage crowd funders, addressing the need for additional capital. This model provides insights into the financing landscape for new ventures, emphasizing the impact of capital structure on profitability and investor incentives.

JEL Classification:

G20, G21, G23, G24, G32, M13.

Keywords:

Crowdfunding, Startup Financing, Bank Loans, Entrepreneurial Finance.

How to Cite:

Saad Alnahedh. Optimal Choice of Funding for Early Startups: Crowdsourcing versus Bank Loans. [ref]: vol.22.2024. available at: https://refpress.org/ref-vol22-a37/