Financing decentralized digital platform growth: The role of crypto funds in blockchain-based startups

Coordination frictions may prevent the efficient adoption and governance of digital platforms. We document that crypto funds (CFs) create value, inter alia, by smoothing such frictions on blockchain-based decentralized digital platforms (DDPs). CF-backed DDPs obtain higher valuations in the primary market (i.e., in initial coin offerings, ICOs), outperform their peers post ICO, and benefit from token price appreciation around CF investment disclosure in the secondary market. In line with our theory, primary transaction data from the Ethereum ledger shows that the valuations of DDPs with meager adoption and relative centralization benefit more from CF backing. Moreover, the positive valuation and performance effects for CF-backed DDPs are higher for CFs with more central investor networks.