Beyond financing: crowdfunding as an informational mechanism

Author paper: Viotto da Cruz, J.

The 2008 financial crisis generated many financial start-ups as incumbent banks were imposed with stricter regulations and a growing sense of mistrust towards them. These financial start-ups offered various services including crowdfunding. Crowdfunding in particular was a new way to finance new ventures as banks, due to higher capital requirements, no longer lent money that easily (Darolles, 2016). Besides studying what makes a crowdfunding campaign successful, crowdfunding can be a source of information for entrepreneurs on the interest of customers about a project. Viotto da Cruz (2018) studies this information component of crowdfunding, analyzing data from Kickstarter. In doing so, the author studies whether several pieces of information lead to a higher probability of releasing a product in the market.

As entrepreneurs face uncertainty when they release new goods to the market and contributors to crowdfunding projects choose the amount they give to a project, this reveals how much potential buyers value the project. Therefore, the central research question of the paper is: how do project owners respond to information from their crowdfunding campaigns? In particular, the author studies how they respond in terms of actually releasing the product after a crowdfunding campaign. Thus, it is hypothesized that an increase of the public’s valuation will lead to more released products as  uncertainty is reduced prior to release.

The following four variables are studied as a proxy for the crowd’s valuation:

  • The total number of supporters. This variable is interpreted as the size of the crowd that welcomes the project.
  • The average collected. This variable is interpreted as how much each participant values the project and is calculated by dividing the total amount collected by the number of participants, as Kickstarter does not publicly reveal how much each participant funded the project.
  • The total amount collected during the campaign. This variable is interpreted as how much the total crowd appreciates the project.
  • The pledged ratio. This variable is the total amount collected divided by the original goal.


Crowdfunding campaigns on Kickstarter are funded through an all-or-nothing strategy, which means that entrepreneurs only have access to capital if they successfully reached a certain financial threshold. So, if their target is not reached, their project will be unfinanced through the platform. This creates two subsamples, successful and unsuccessful projects. Even if the project is unsuccessful on Kickstarter, it is hypothesized that the probability of releasing a product increases with the contribution. So, the focus of this study is on unsuccessful projects.

To study the hypothesis the authors focused on projects that aim on producing music albums. Musicians are considered as entrepreneurs on crowdfunding platforms as they independently need to fund their music album. In order to study whether they actually released the album, data from iTunes and Amazon was collected. Data consists of 707 unique project owners, from which 185 are unsuccessful and 522 successful, and is collected in a period from August 2014 to May 2015.

A number of control variables are being taken into account. First, data from the artists’ websites is collected, in order to collect the number of previous albums, which is considered as a proxy for alternative financial resources. Secondly, the number of Facebook fans are being taken into account, as more fans would lead to more promotional possibilities. Furthermore, it is assumed that the crowdfunding campaign and production happen sequentially, which could in fact also happen simultaneously. This is important, as this may influence the decision to release the product as fixed costs may already been incurred. As releasing may just be a reason to recover these fixed costs, the control variable production phase is being taken into account by using Kickstarter’s estimated delivery of rewards as a proxy. Also, the author controlled for genre, as some genres have different commercial appeals. Furthermore, project quality is being taken into account as presence of video and high text quality signals the effort an entrepreneur has taken to release the product.


After analyzing all the variables, all four variables (total collected, supporters, pledged ratio and average collected) are statistically significant and thus imply that informational mechanism effect the release of new products in a crowdfunding context.  Furthermore, probability on product release is calculated when the number of supporters is increased by 10%. Overall, an increase of 10% leads to 1.4 percentage point of probability increase of releasing the product to the market. However, between the variables, this increase in probability differs, suggesting that each type of information adds differently to the total information mechanism.



The strength of the paper is the robustness of the findings as results are controlled by various control variables specific to the production of music. Furthermore, the author analyzed whether the results also hold for the successful project owners, which in fact none of the variables is statistically significant. This means that the informational mechanism only works for the failed projects. Also, to further check whether there is a casual link, the author analyzed whether the results hold in another category. Although, the variables contribute differently to the results, the variables were statically significant for the Design category on Kickstarter, which contributes to the robustness of the findings.



The main weakness of the paper is that the author makes some assumptions about the possibility of alternative financing outside the crowdfunding platform, which may explain why unsuccessful project still will be released to the public. To say, that it is unlikely for an artist to use multiple platforms at the same time is, in my opinion, not a strong argument. Furthermore, the author only studied Kickstarter, which may reduce the generalizability, as other platform for music producers may attract other artists with different interpretations of the crowd’s valuation.



Darolles, S. (2016). The rise of fintechs and their regulation. Financial Stability Review, 20(4), 85-92. Retrieved from https://publications.banque-

Viotto da Cruz, J. (2018). Beyond financing: crowdfunding as an informational mechanism. Journal of Business Venturing

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