Abstract
We propose a model of startup staged financing where entrepreneurs choose between ICO and traditional entrepreneurial finance sources such as Venture Capital (VC). While in early stages token sales allow startups to leverage network externalities by building a large customer base, VC's value-adding services enhance productivity in later stages. Due to complementarities between externality effects and value-adding services, the efficient solution to the entrepreneur's problem is to use both funding methods sequentially. However, the lack of transparency in cryptocurrency markets prevents most startups from choosing the optimal funding path. A selection equilibrium arises where entrepreneurs with low-externality projects choose to raise VC capital only in order to avoid adverse selection in later stages. Using data on funding rounds of blockchain startups, we provide empirical evidence for both the complementarity assumption and the selection result