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Signaling in Equity Crowdfunding


Crowdfunding practices can present benefits and risks for both project founders and funders. For funders, in particular, risks can arise from the uncertainty on the founder’s (in)competence and/or (dis)honesty in effectively carrying out a project as specified in the crowdsourcing platform, and give back resources to funders also as specified in the platform. If the founder happens to be a well-established company, funders may tend to be less worried about these risks, trust the company and commit financial resources to the founder’s project. Trust is thus paramount in online crowdfunding contexts. If trust is absent, founders may well receive no funds from the crowd for their projects. Instilling trust is thus of vital importance for a founder who wishes to carry out a project successfully. How then, can trust be inspired in crowdfunders, who may include people who have never seen or heard of the project founder?

Signaling in Equity Crowdfunding

Proper signaling has been identified as being one of the most effective strategies for inspiring trust in crowdfunders and thus increase the chance of funding success for  projects. Potential funders can infer unobservable venture features (e.g. future returns on investment) by individuating observable features that “signal” the likelihood of positive outcomes in a project. One seminal paper in this field (Ahlers et al., 2015) examines signaling in equity crowdfunding. Equity crowdfunding is chosen based on the usually small (monetary) size of investors and on the pressure for return on investments. These two characteristics make equity crowdfunding particularly suitable for measuring the effects of signaling on investors’ trust in projects and founders. In fact, Angel investors/venture capitalists, contrary to small investors, usually have all the resources and capabilities to quickly and relatively inexpensively evaluate a project, without the need of signals; and other types of crowdfunding, such as donations-based ones, typically do not require the same level of trust as for equity crowdfunding.



By analyzing 104 projects and their funding success within 1 year, the authors find that three reported aspects of a venture provide significantly important signals to small investors, so as to spur these latter to invest in a certain project. The first aspect is the human capital of the firm. In line with what logic would suggest, the authors find that better venture’s human resources’ knowledge, competences and educational level provide positive signals, inspire trust and spur small investors to commit financial resources to the venture. Two more interesting findings relate to the perceived level of uncertainty of a venture. More specifically, the authors find that a founder retaining a significant amount of equity in his/her project represents a potent positive signal for investors. Retaining large equity shares as a founder is costly and is thus undertaken only if the founder expects with a high degree of certainty future positive cash flows on the project. Its costly nature makes retaining equity an observable potent signal to small investors. The authors also find that reporting a project’s financial projections and potential risks in venture information can reduce the level of uncertainty and allow investors to better evaluate a project. A founder reporting such information shows his honesty and full awareness and understanding of his project risks and potentials. This information can also signal investors a founder’s will to reduce information asymmetries. Thus these founders’ behaviors, by making a project evaluation easier, more precise and oftentimes more reliable, provide a potent signal to small investors, who would thus be more spurred to commit financial resources to the venture.



The study is the first-ever empirical examination of signals’ effectiveness in equity crowdfunding practices. As it is in all academic papers, this one’s findings and methodology also presents limitations. First of all, the authors choose to evaluate signals’ effectiveness only in equity crowdfunding practices. This aspect inevitably limits the scope of their findings. In other crowdfunding practices, like donations-based ones, other non-monetary rewards are likely to be important to funders, and thus other venture aspects may be reported to signal venture reliability and assure potential investors. Another limitation lies in the authors’ only data source: ASSOB, an Australian equity crowdfunding platform. A platform fully regulated by Australian laws, ASSOB also presents inherently unique policies and norms, such as data sharing policies and offering periods’ rules. This entails a low generalizability issue, potentially binding the authors’ (non)findings to the specific platform’s policies and regulatory standards.




The paper by Ahlers et al. (2015) contributes to show how important it is to instill trusts in potential funders in crowdfunding contexts. In accomplishing this, sending proper signals can be very effective. Indicating appropriate venture information can signal a venture’s realistic potential of positive outcomes. If done properly, signaling can be very helpful to founders to increase their funding success, and provide potential funders with what matters most to them in crowdfunding contexts: trust and assurances.





Ahlers, G. K., Cumming, D., Günther, C., & Schweizer, D. (2015). Signaling in equity crowdfunding. Entrepreneurship Theory and Practice39(4), 955-980.

Sharing and Translating lyrics for the world: Musixmatch

“Words matter” or “Your free music sounds better with lyrics” are just two of the slogans that best describe Musixmatch, the Italian start-up that has come to be the world’s largest lyrics catalog and platform. Founded in 2010, the company has grown to reach more than 60 million users around the world. But how does Musixmatch work?

The Musixmatch catalogue, platform and app principally allow users to: 1) access lyrics and/or their translation in other languages; 2) share and/or review written down and/or translated lyrics from songs all around the world; 3) synchronize their music library of many music apps (e.g. Spotify, Deezer, Google Play Music) so that the lyrics pop up (like in Youtube lyrics videos) when one is listening to a song on a music app in his/her device; and 4) create the synchronization song(s) – lyrics, which will then be shared worldwide via Musixmatch and the apps in which Musixmatch is supported.

Musixmatch has been thus ideated for users who want to search for lyrics and also who want to see/think about the lyrics while listening to a song. In this respect, Musixmatch CEO Massimo Ciociola points out (paraphrased): “The fifth most searched category in Google is lyrics. Why, in accessing lyrics, can’t we provide a better, faster, more complete, more comprehensive catalogue and user experience with songs’ lyrics?” Another, peculiar aspect of Musixmatch is the size of its workforce compared to its users’ base. 30 employees (all engineers) vs more than 50 million users/downloads. These figures point out to an important feature of Musixmatch: the fundamental role that users and contributors have in creating value for the platform. In this respect, Musixmatch encourages users to contribute to the catalogue, by either writing, translating, reviewing or synchronizing songs’ lyrics. In this way, Musixmatch, like many other platforms, has been subjected to so-called “network effects”, where the value of the app to users has increased due to the increasing number of contributors. As CEO Ciociola points out: “Lyrics  missing? We ask the community”.  The incentive schemes for this crowd-sourced component can be best described by quoting the company’s website: “Inside the Musixmatch community users earn points based on the actions they do on the lyrics. Based on those points the user can reach a higher level and status in the community that give more power to his/her actions”. Therefore, the incentive scheme for users to generate value for the app does not include monetary rewards, but only recognition in terms of status/power of action in the user community.

Despite this absence of monetary rewards for contributing, and despite the fact that the company has not officially become profitable, there are several mutual benefits of this contribution-based system for both the firm and contributors.  Users, through their contribution(s), can “show-off” and gain “social” benefits, in terms of increased reputation and self-esteem in the community they belong to. Some top users can even become “curators”, which “gives them extra powers to control what’s happening in the community”.  Another aspect that Musixmatch emphasizes is the “feeling” aspect, where the firm asks “passionate” users who really enjoy to share lyrics to contribute. This emphasis is perfectly justified by the fact that people indeed love to share lyrics and the emotions that come with them and their blending with music in many social settings. We can think of Facebook, Twitter, or Youtube, but also of more offline settings like parties or night campfires with guitars and other instruments.

Musixmatch, from its point of view, sees the value of its platform increasing as more and more of its users contribute. Musixmatch’s current main source of revenue is data licensing , but the firm is also considering to  start selling advertising space. Either way, a platform with larger amounts of data, which results from the network effects from the increasing number of users, can be a greater source of revenue for Musixmatch. The costs of monitoring the crowd-sourcing process can be rather limited. The microtasking nature of sharing, reviewing and translating lyrics does not require high levels of cognitive ability, competences or a particular expertise to check the quality of users’ contribution. Also, often times quality checks for lyrics translation and composition are done by the users themselves. In this respect, the company has been able to successfully set up a firm and effective set of community rules that regulates users’ activities.

In terms of external arrangements, Musixmatch has been the first lyrics’ app and platform to formalize legal agreements with major international publishers, such as EMI Publishing, SonyATV and PeerMusic among others. This has permitted MusixMatch to legitimize its role in the apps and catalogues’ world, to increase its users’ base and to become the world’s largest lyrics’ platform, or, as CEO Ciociola points out, the “Music Vocabulary of the World”.



Blohm, I., Zogaj, S., Bretschneider, U., & Leimeister, J. M. (2018). How to Manage Crowdsourcing Platforms Effectively?. California Management Review, 60(2), 122-149.

“Musixmatch Wants to Be the ‘IMDb of Music Lyrics,’ Launches Lyric Video Messaging App”Billboard. Retrieved 2018-02-17

O’Hear, Steve. “Song Lyrics App Musixmatch Hacks Its Way To 50M Downloads/30M MAUs, Adds Spotify Support”TechCrunch. Retrieved 2018-02-17