 Thank you and excellent to be in this event talking with you and you saw a little bit before the impact certificates obviously it's a very new thing for me so it seems like scientifically reasonable thing to do to first try something on oneself rather than on somebody else so apart from being a researcher in finance I also studied at university level arts so I kind of put there as an impact certificate music art projects that we have with my husband and it is very interesting community itself as well so modular synth involves people using different sets of modules that modify the sound and they are then patched together so obviously this thing is never going to produce something similar different artists will not produce something similar it is a lot more flexible than a synthesizer that has like a set of functions in built and there are exciting modular music communities in New York of course in Montreal as well where we are based around the world during covid times have a great virtually events as well and then in addition our project like while the music is happening I'm doing live digital art so you could check it out hopefully we'll have a concert in London sometime soon but now going to the topic of my talk it is about crowdfunding and I'm going to put on now my finance economist act hat and I'm going to assume not just communities but very self-interest individuals and what I'm going to talk about in particular is reward based crowdfunding that is now over 10 years old but it is very much related to the other fundraising mechanisms that have emerged and are emerging also in digital space like initial coin offerings even so this term is probably not very popular anymore we can call them consumer token offerings there is a natural connection with NFTs and many other initiatives at this conference is about and the key idea is what makes it different from other sources of crowdfunding which in the broadest term just would involve some crowd giving some funds to somebody what is interesting about reward based crowdfunding is a fact that expectation is to be receiving some non-financial reward typically it is a promise to receive a product or service sometime at a future date and what is fascinating about it is of course a fact that that's a time of asking these funds like it is possible and likely that's a product or service doesn't yet exist so in a way it is proposing something very new compared to like hundreds of thousands of years or maybe this is less than thousands of years but like financing where normally what we would have is that somebody has a great idea they have a need for investment and they would need to reach out to some financial investors be it's a bank speed venture capitalist and then hopefully develops their idea and then long time later on try to sell it to the consumers and find out whether anybody wants a thing that was created to start with okay and in this case when we are thinking of innovative ideas there are particular difficulties to get financing because these projects often don't have tangible assets that you can collateralize no stable cash flows things like debt contracts are probably not optimal because these projects may with a high probability fail and in this case as a financier will not get anything in the case of success they would get a small interest rate which I guess in this case would need to be enormous so it's natural that say investors would want to have some bigger upside in the case of success and then because of this intentionability as well like there are a lot of problems with aligning incentives because entrepreneurs themselves or artists may know better how able they are to create something and outside investors they may have incentives to not develop the product to just get financing and enjoy it without putting in enough effort and so on so it's very difficult to align incentives there hence a lot of good projects end up being not finance because there are not enough venture capitalists for all good ideas and in contrast in the case of reward place trending like as I said before there is a promise of interaction with direct directly with the consumers of the firm itself because eventually these are the people that are going to generate the cash flows that would be also needed for paying back to these investors made in the previous slide so of course these investors so these individuals they could either provide enough funding for the project's investment or it could be still some need for the traditional financial contracts and players there and what is we all know that like reward based crowdfunding works like pretty well actually the cases of obvious fraud are very rare there but it looks like almost on a superficial site too good to be true because as a firm it looks like an excellent deal I can get money I don't have to give up even some ownership of my shares right I will be eventually selling the product to my future consumers like before I even produce it so it looks like an excellent way to finance something while at the same time it would be potentially risky for the consumers participating it like because very possibly they are not going to get anything unless incentives are aligned in this sort of system so related to that we were working on the research to try to understand why does reward based crowdfunding work because we know that the venture capital financing contracts are rather complicated to align incentives using convertible assets having a venture capitalist closely engaged with managing the firms and so on so there is a lot of things happening there to align the investments and now with the crowdfunding we just have individuals that are not associated with a firm or potentially even in a different country somehow managing to overcome this incentive problem and so the greatest issue is that what how does crowdfunding seeming to be overcome the moral hazard problem which is just telling the entrepreneur could have a crowdfunding campaign get money and does and not produce anything telling that things just didn't work out and it's like extremely difficult for these investors potentially in different places around the world having a small amount of money placed in the project to take some action to win this thing in the court especially if there can be good reasons that the project didn't work out rather than fail okay so related to that we have this theoretical research paper with professor Jill Shamla who is in Imperial College London and we are asking there is that what is a source of value creation in this I should be specific reward based crowdfunding what types of firms would benefit most of it and how do we overcome this incentive problems that I just mentioned and additionally our model talks to the case of why is it useful to have third-party platforms there so why is it for many firms not necessarily a good idea to run a crowdfunding platform on their own website for example and it's going to be potentially not too surprising because it is commonly understood in the communities that one benefit of reward based grants the crowdfunding is that it enables to test out the market to find out whether there is a demand for the product to be created okay and this aspect actually turns out to be important not just about learning about demand but also to the moral hazard problems that I will mention and what is a benefit about learning about demand it is it's giving what we call real option value which is enabling better investment decisions so in a way as a firm I'm happy in both ways I might run the campaign and I learned that service I say enough or even in a good case more demand for my products than I expected example so I'm very happy to invest I'm also happy if I turns out there is very little demand for my product because at least I'm going to save investment costs and time of effort by knowing that it's probably the case my consumers are not going to value this product so it's no point in developing it so the real option value of learning is here going in both cases and second I will show that like what this value of learning does it is also what mitigates a moral hazard so in this model we allow entrepreneurs to run away with the money they raise in crowdfunding at no cost whatsoever of course in reality there could be a reputation cost more cooperative entrepreneurs and it's less likely but that is like an extra bonus so if something works in a case that we make assumptions that everybody is extremely self-interested and it is certainly gonna work even better in the case that it's not totally as a case and what is also like very much a feature of like many crowdfunding campaigns it's a campaign lens that tend to be short and actually the shorter campaigns have been empirically shown to be more likely to succeed so again a superficial way would be to attribute it to short campaigns involving some sort of enthusiasm so which can definitely be a part of the story but in our setting where short campaigns are crucial because of this moral hazard problem because it is what enables to overcome the line incentive problem so namely suppose that I have reached one million of funds like during my crowdfunding campaign but if after that I think that in the off-the-market I'm gonna sell for five million I don't want to run away with this one million Exanta and give up five million okay so in that sense like this is a way that we argue that the reward-based crowdfunding um overcomes moral hazard problem but it of course has a bit of implications of what sort of products can benefit from crowdfunding okay so I'm not going to go into the full proofs and the details of the model but I think that it is still useful to highlight like a simplest setting to emphasize the same arguments that I just make them so in this setting imagine that firm has identified its target market so it has in potential consumers and some of them an unknown fraction of them will want to buy the product because they like the product and what is technically cool is that it's actually very useful to use a beta distribution here because that can allow the prior beliefs about the demand to take any sort of form so here it is like some examples of what beta distribution can look like so here so firm for example thinks that so there's a distribution function so this in the horizontal axis is a share of customers in the target market who values a product so it could be relatively concentrated in the middle so the firm expects like said to be 50 percent of the target market wanting to buy a product but it could end up being here as well but with a lower probability so obviously this case involves less uncertainties and this U-shaped case and obviously things don't need to be symmetric and this is a very flexible distribution so what is crucial here and what is uncertainty about is the fact that we don't know exactly what this fraction exactly is so that is some things that we can learn about during the crowdfunding campaign okay and then after that will be like the interaction between consumers in the market or the agents and the firm everybody is rational and risk neutral it would be even extra benefits if the firm is risk averse because we have reduction of uncertainty but let's make it risk neutral and so then there is a crowdfunding at some data and some fraction of the consumers will have be will be reached during the campaign and it is turning out to be crucial that we can't be trying to sell to all our target market because after that sir would be in our setting an obvious case for just taking the money and running away rather than producing anything because money is already there why bother and we also have consumers that have choices they don't need to buy the product that's a crowdfunding campaign so you have a choice even if they like the product they could delay and buy it when it already exists rather than in the earlier case okay and then the firm has a choice whether to invest or not and it then invests and produces it that's they do so we are aiming to solve here's a perfect patient equilibrium of this game and also figure out like the other features of the optimal mechanism so should it be all or nothing like for example Kickstarter should it be that the firm keeps all funds raised and so on okay so I'm gonna just illustrate two equations that are highlighting the ideas that I already said so one is a good parallel to crowdfunding in our opinion is to compare it to the frictionless consumer survey so suppose that I could get a part of my target market and ask them whether they like my product or not and then make update my beliefs based on that of course the problem is that is here it's like these people could just as well tell me they like the product without any intention of ever buying it and you would never do it in crowdfunding because you are actually risking your own money so you would not pledge for a project that's that you don't value so based on this frictionless service that is benchmark so projects in PV would be pretty simple so these are like suppose that little m consumers I have said that they like the product so I know them this is off the market so these are the ones that I'm having in my target market and haven't yet reached that I'm hoping to sell in the future and I am updating my beliefs about how much demand for my product there is okay so if this is non-negative I will invest and things are good so here are just some examples about like how the updates would be updated sorry the beliefs would be updated here so again share of customers here probability distributions here so the black one is here as a prior beliefs and if I get more than my exact expectations of people uh telling that say like my product here I'm going to increase like my expectation so this is blue here so the beliefs have gone up and that's why I said that risk aversion would be working in the good direction as well because uncertainty is reduced because we have this distribution much more concentrated of course I could also get a negative news to this mass my initial beliefs about my target market but it turned out to be less than that so I would have updated my beliefs here so what is the case here that one can show that like the type of firms in terms of their finances so ones that would benefit most from our crowdfunding are the ones that are just that's a virtue of breaking even based on the prior beliefs so if I don't know whether my project is worth it or not then it is most valuable to test it out in a crowdfunding so if it is that I'm very certain of my product it's very unlikely to change my mind as a crowdfunding outcome and so if I can get financing from other sources like there is no need to do it and second pretty intuitively as well is that's a value of learning is highest for firms that face the greatest demand uncertainty which fits very well together for example in Kickstarter's projects that getting most attention as a technology catcher rather than things like food because it's still developing a new technology catcher is noticeably more uncertain whether there is a demand in a restaurant where I can just compare it with something reasonably similar okay and what is also crucial and like one needs to keep in mind in terms of testing's demand is that what gives later on the incentives to continue with the project is that I have to update my beliefs about off the market so if my crowdfunding crowd is very different from the ones that I'm going to try to sell later or engage later it's not going to give me information it's actually going to make some more hazard problem worse so if I can get financing from somewhere else it's better thing to do to give an example without mentioning a concrete company's name since a crowdfunding campaign they also aimed to find out whether there is a developer interest in around the technology products that they were creating and it would be necessary for the product okay so then some people bought a developer version of the product and it would be potentially seen as a good news but it wasn't like probably the right developer market to attract because it would be maybe the people who just wanted for their personal use to play with the gadget rather than the ones that would be providing the programs or applications for the overall ecosystem right so this is one example of the crowdfunding sample being different from the actual target market we want to learn about so it's a better be the same because as I'm going to show the equation again that is highlighting the incentive issue here is that when we can disappear with funds at no costs and we are comparing like these two objects so this is similar to the NPV before in the case that I invest okay so I'm going to raise that much money during the campaign I'm going to update my beliefs about future demand I'm going to subtract the investment cost and now I'm going to compare it with just taking the money that I have raised and and running away with it so given that overcoming the moral hazard problem requires like this it requires an off the market covering the investment cost that is going to give me incentives so of course if nothing would have been changing here because of learning from these new consumers and the crowdfunding can easily become problematic and like not credible so what we are here so it's nicely showing that we need to keep large enough off the market hence connection with the short campaigns and we will need to have our beliefs changing based on campaigns so as a practical thing the campaigns that have ambitious targets and then all of nothing game means is all of nothing mechanism means is system turns out to be optimal okay so in the model we would allow also some to send any target or not to set the target at all but it turns out to be optimal to set the target which will incentivize a firm to invest provided such a get financing and such a target would need to be somewhat high so reason to be suspicious about the targets that are like one dollar or something okay and then it is also relating to the ideas that why do we need third party platforms because they facilitate commitment to short campaigns so I ran it on my own website things don't go well well first I could just lie about the demand telling that I have like sold thousands of units while I have sold five and second there is a little very little reason of doing it in so own campaign to own the website to keep the campaign running forever hoping that some more people will pledge money I have no intention to invest anymore and I'm gonna just aim to divert all these things okay and this statistically kind of also very nicely relates to observations in these campaigns that for example if you are looking at the technology projects that have the greatest uncertainty arguably send conditional on the project being funded actually the campaigns are often massively overfunded which is interesting because if you would have an interpretation that there is some sort of charity aspect dominating it and why are the investors giving them money more than a firm needs like several times so we can see here that if we look at these distributions and about 10% of campaigns get like five times more money than they set target for and this is true even if we exclude projects which have like ridiculously small target which would be so this thing is not driving the results of course and said technology one way to look at like how much uncertainty there is to look at this different figures but as I don't have too much time I'm gonna skip it just to highlight here we are contrasting here's our uncertainty in terms of the distributions now not only looking at the successful campaigns but all but the technology which is blue and theater which is one of the less popular categories in Kickstarter for example since overall distributions like in terms of second-order stochastic dominance we would see that's a theater indeed sorry so technology indeed involves greater uncertainty so if successful technology projects raise multiple times over the money the target say raise but they also more likely to fail and not reach a target funds so this has these predictions are very much consistent with with interpreting crowdfunding like that okay and so as during the last few minutes I'm gonna mention what I said at the beginning that there are other initiatives especially in the digital space that are somewhat similar to the crowdfunding and there are other positives that like digital interaction can enable so one thing also mentioned in some other crowdfunding rare and ICO related papers by recent authors so the facts that says in the case of something like ICOs or like especially utility tokens in addition to learning about demand of individuals for a product like we can learn also about whether there is a network effect which is necessary for many platform businesses and maybe even create a network effect depending on a particular project we could not have this moral hazard problems that I mentioned if we could make the investment conditional so suppose that I am as an artist wanting to buy some sort of equipment and asking money in exchange so it could be the case that with a smart contractor you're only gonna get this money that has been arranged if I provide the proof of making this investment of this product that I have so after I have spent this money then obviously I would not have this same moral hazard problem so of course we can't make all investments especially if they are not tangible solved by the conditional payments but they would greatly help one can also think of there being like other innovative payment mechanisms to for example overcome strategic obsolescence because we know that for good strategic reasons or actually bad strategic reasons but good for profit reasons firms often reduce the quality of the objects that they produce so think of a refrigerator like I used to be better technology refrigerators sold in in pasta and so there is like a tendency for firms to intentionally reduce the quality of the projects to sell more in the future so for example if you would imagine that this refrigerator is somehow connected to a system and like records whether it functions or not because it sells a refrigerator by having it effectively more similar to a rental contract or most certainly include refund in the case that the refrigerator stops funding functioning okay in this case like the firms that were reduced like the quality of the refrigerator for strategic purposes would not have incentive to do it anymore but there are also potentially additional problems because we need to be careful of not changing the rules in a process in a way that benefit new consumers and the expense of the old consumers of any digital project I'm happy to discuss it more like in later discussions but there is a big question around like is it goods that many digital tokens are tradeable on of course on one hand it makes things more liquid but on another hand there is a demand for this particular assets that are not driven by the preferences in the target market so that can model what we learn about it it can drive the price too much for the target consumers and so it's an interesting question about is a tradeability of digital tokens good should be intentionally make some things less tradeable okay and more things when we have more parties so overall like a remote based crowd funding and related developments I would argue is one of the most novel and exciting and game-changing ways of thinking of financing because we can also make more traditional fundraising contracts for financial reports better with these technologies but what is exciting here is exactly the interaction with eventual target market directly and thinking about mechanisms that can actually maintain the creators in the investment incentives in this project so I would argue that it is probably on around all exciting ideas is still try to see whether in the worst case scenario creators would still have an incentive to develop this product or not and finishing again with the same ideas that if something works with very selfish agency it is certainly gonna work with a less selfish agency event okay thank you