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(R)evolution in Entrepreneurial Finance? The Relationship between Cryptocurrency and Venture Capital Markets

Author

Listed:
  • Kirill Shakhnov

    (University of Surrey)

  • Luana Zaccaria

    (EIEF)

Abstract

We propose a model of entrepreneurial finance where start-ups raise capital via Initial Coin Offering (ICO) or traditional funding methods such as Venture Capital (VC). While token sales allow startups to leverage network effects, VC's value-adding services enhance product quality. We show that, even when projects have large potential network effects, ICOs may not be optimal if entrepreneurial ability is low. Moreover, despite the potential complementarity between network effects and value-adding services, entrepreneurs combine VC and ICO funding only in highly efficient VC markets and for projects with high network effects. Using data on funding rounds of blockchain startups, we empirically validate the main results of the model.

Suggested Citation

  • Kirill Shakhnov & Luana Zaccaria, 2022. "(R)evolution in Entrepreneurial Finance? The Relationship between Cryptocurrency and Venture Capital Markets," EIEF Working Papers Series 2202, Einaudi Institute for Economics and Finance (EIEF), revised Jan 2022.
    • Handle: RePEc:eie:wpaper:2202
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    References listed on IDEAS

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