When crowdfunding meets bank financing: Substitute or supplement?

Crowdfunding is a new financing method that is widely utilized by startup firms to substitute or complement bank loans. We consider the optimal financing problem for a profit-maximizing startup firm, given that both the crowdfunding demand and retail market demand are uncertain and correlated. We find four types of financing strategies: single-source (crowdfunding only) and dual-source (crowdfunding and bank loan) financing, with prudent or aggressive goal-setting in crowdfunding. The four strategies each can be optimal for a specific parameter range with respect to the uncertainty ratio of crowdfunding and retail markets and the cost of crowdfunding. Upon deriving optimal strategies, we analyze comparative statics for the strategies and optimal profits. We show that, among other interesting results, market expansion (through either crowdfunding or the retail market) always calls for a higher crowdfunding goal but may raise or reduce the optimal bank loan depending on which market expands, and market expansion generally increases optimal profit except when the crowdfunding market grows too large which intensifies the overfinancing risk. Moreover, a high correlation between crowdfunding and the retail market does not necessarily favor the use of crowdfunding capital, nor does it always increase profits, and the impacts must be co-examined with the underfinancing and overfinancing risks.