The Experts in the Crowd: The Role of Reputable Investors in a Crowdfunding Market

This paper examines the role of experts in an online crowdfunding market. Using a novel data set on individual investments in a crowdfunding market for mobile applications, we investigate whether early investments serve as signals of quality for later investors, and if the value of these signals differs depending on the identity of early investors. We find that while early investors have a significant influence on later investors, not all early investors are equally influential. Specifically, we find that among the early investors, two categories of experts — app developer investors and experienced investors—have a significant influence on the later investors the crowd. More interestingly, the specifics of their expertise determine their influence. App developer investors who have a better knowledge of the product are found to be more influential for “concept apps” (apps in the pre-release stage), while experienced investors – investors with a better knowledge of market performance are found to be more influential for “live apps” (apps that are already being sold in the market). Our findings show that the majority of investors in this market – the crowd – although inexperienced, are rather sophisticated in their ability to identify and exploit nuanced differences in the informational content of the investments made by these different experts. In examining the ex-post performance of apps, we find that successful funding in the market is positively associated with ex-post app sales and that the quality signals provided by the experts’ investment choices are indeed credible. Contrary to popular perceptions of crowdfunding markets as means for democratizing expertise and as substitutes for traditional expert-dominated mechanisms, our findings indicate that despite the freedom of choice provided by these crowd-based markets, the crowd’s decisions are highly influenced by experts participating in these markets.