Paper Title
Optimal Choice of Funding for Early Startups: Crowdsourcing versus Bank Loans

Abstract
In this paper, I investigate the optimal choice of funding for an entrepreneur with an early startup. In particular, I consider the choice between funding from a bank loan and the crowd. In this setting, I develop a preliminary two-period theoretical model where potential consumers self-select themselves to crowd fund the launch of the startup based on the product’s perceived quality. In-line with the currently popular crowd platforms like Indiegogo and Kickstarter, I do not consider equity participation from the crowd onto the startup. Rather, the model relies on network externality effects and product quality to attract the crowd funders to participate. Further, I allow the entrepreneur to inter-temporally price discriminate in order to extract as much profit as possible. In equilibrium, I find that crowd funding is optimal when the startup costs are low, while a bank loan would be optimal after a certain threshold. For larger startup costs, however, I find that neither crowd funding nor a bank loan is optimal, which could warrant the inclusion of an equity participation analysis to incentivize optimal participation from investors.