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Policymakers concerned about stimulating small business and entrepreneurial growth need to better understand the dynamics of crowdfunding as a vehicle for that growth. The conventional wisdom is that raising cash through crowdfunding always benefits entrepreneurs. But that is not the complete picture. In reality, there are ways in which entrepreneurs, as well as VCs looking for new investments, may actually be left worse off after a successful crowdfunding campaign. This issue brief examines the potential pitfalls of a successful campaign. These include a moral hazard problem that comes into play when entrepreneurs explore both crowdfunding and venture capital investment, which can lead to a breakdown in negotiations between entrepreneurs and VCs, leaving the VC without a potentially lucrative project and the entrepreneur without the VC’s essential financial support, expertise, and guidance. While the brief focuses on reward-based crowdfunding platforms, the pitfalls described herein likely apply as well to peer-to-peer lending, real estate, and equity-crowdfunding platforms too.
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Tsoukalas, Gerry; Marinesi, Simone; and Babich, Volodymyr, "Updating the Crowdfunding Narrative" (2019). Wharton Public Policy Initiative. 65.