Crowdfunding For Life Sciences Companies: To Seek Or Not To Seek

crowdfunding for biotech and life sciences startupsBy Nishi Viswanathan

“We are a team of guerrilla fundraisers who have launched a global campaign to fund research into a potential treatment for the cancer that killed Steve Jobs. The potential therapy, a cancer-busting virus, is currently sitting in a freezer in Sweden – but it can’t be tested for lack of just £2million” was iCancer’s pitch on Indiegogo, a crowdfunding portal. The company brought in more than $160,000 from this campaign.

Microryza is another crowdfunding platform exclusively for scientific research projects, available only to PhDs and professors who can attempt to raise money through this private channel instead of applying for grants.  “This solution helps close the gap for potential and promising, but unfunded projects,” Bill Gates says about Microryza. With Kickstartr’s popularity, there has been an explosion of growth in crowdfunding portals, both general as well as ones targeting a specific niche.

Life Sciences companies have slowly started to explore these non-traditional sources of funding. After all, things haven’t been looking so good lately in terms of fundraising. According to the recently released MoneyTree Report published by PricewaterhouseCoopers and the National Venture Capital Association funding for biotechnology ventures fell 33%, and investments in medical devices and equipment enterprises dropped 20% quarter to quarter. The long and expensive road to market combined with economic uncertainty is driving risk-averse investors towards existing companies with products in late-stage development. The environment is tough but for small bioscience entrepreneurs who want to save the world, hybrid sources of funding may offer renewed hope.

Crowdfunding: How It Works:

There are primarily four types of crowdfunding sites: Reward (Investors don’t receive a monetary reward, but may benefit from access to early versions or social perks or solely from the pleasure of being able to see a product become reality eg. Kickstartr), Donation (Altruistic motivations for giving. With L3C status, companies can seek funding from foundations and non-profits eg. Donate.ly), Equity (Members of the crowd receive an ownership interest in the entity eg. Microventures.com) and Loan (Sometimes interest free if accompanied by social motivations eg. Upstart.com).

Here is how it typically works: A company prepares a pitch and a short executive summary, much like the traditional fundraising model. The pitch is published on the crowdfunding portal along with a goal, –say $ 1 million for product development and 510k for approval. Usually, companies are required to reach their funding goal or the investors get their money back, but this varies from portal to portal. A huge degree of transparency is expected during the process with regards to the fundraising progress as well as the company’s expected milestones. Of course, since no investor invests a substantial sum, the amount of risk involved is usually very low. The portal keeps a percentage of what is invested or donated, sometimes even to the tune of 10-20%. In some cases, a flat fee is charged.

Life Science entrepreneurs who are not well versed in social models might see all this as a huge paradigm shift, but research shows crowdfunding might be a good fit for the healthcare industry. A national survey conducted by Harris Interactive in 2010 shows that 80% of the respondents give time or money to charities; medical research came in second overall among the list of causes people are most inclined to donate to.

Is Crowdfunding Right For Your Life Sciences Startup?

Whether crowdfunding becomes a major source of funding for startups is anybody’s guess, but one thing is clear- It is definitely a source many life science CEOs could consider, especially if their product meets two criteria: Firstly, it solves a known problem and appeals to people’s emotions. Secondly, the project costs don’t run into millions of dollars. Obviously, Healthcare IT and Medical devices may be more suited than traditional pharma and biotech where development and regulatory costs are enormous. Plus, it is important for entrepreneurs to carefully consider the target audience and guidelines for any specific portal. “We showcase only what we consider to be fundable deals.  Plus, you have got to have enough of the product built to have some customer interactions” says Hall. T, Martin, founder of Texas Entrepreneur Networks, which now has a crowdfunding portal on its website.

If you are considering going this route, Robert Mitchell, VP of Business Development and Strategic Partnerships at Crowdfund Capital Advisors has some tips for you. “Obviously, there is no crowdfunding without a crowd so it will be important to have a strong social media presence and network of individuals likely to understand, believe in, and trust your business.” Entrepreneurs must present simplified versions of their business models so they are easily understood by laymen.

“Crowdfunding can also demonstrate the early efficacy of a project, and may signal to the market and bigger investors your new technology has some potential. Life science CEOs could also take advantage of crowdfunding to fund specific projects rather than their entire company” says Robert. Companies can also explore the other possibilities with crowdsourcing such as recruiting volunteers for clinical trials, seeking support from scientists and opinion leaders, building virtual focus groups and other non-monetary benefits.

Drawbacks To Crowdfunding:

It is not all hunky-dory in crowdfunding land. The JOBS Act of 2011 had some promising reforms for entrepreneurs, such as creating an exemption legalizing the equity model and allowing startups to raise $1 million through crowdfunding transactions within any 12-month period from an unlimited number of investors, with each limited to an investment of $10,000 or 10 percent of their annual income or net worth, whichever is less. However, the Securities and Exchange Commission has not released the regulations establishing equity crowdfunding, and although it is anticipated that this will happen in the summer of 2013, the actual registration procedures will likely take months. The main concern from SEC’s side: investment fraud and adequate guidelines for newbie investors.

In addition to regulatory issues, there is also the mounting concern that crowdfunding would not be able to make a real dent in a life science company’s goals. Managing hundreds of investors and filing audited financial statements with the SEC (if more than $500 K is raised) could be a logistical nightmare but more importantly, the fear of dealing with amateur stockholders and the requirement of transparency might keep conventional investors away, throwing a wrench on subsequent rounds of funding.

We might be years away from turning everyone with a few extra dollars into an investor but life science companies or individuals that need their first $500 K or $1 million to get going are currently good candidates for this type of fundraising. One thing is clear- in the healthcare market where bringing new products to market is both expensive and risky, there is a need for new and improved funding mechanisms to further medical innovation.   For companies that don’t see a good fit today, the smart strategy might be to keep a close eye on developments in hybrid funding while continuing to pursue traditional routes.

Though the campaign on Indiegogo did not bring in the £2 million iCancer had hoped for, the publicity generated by the company caught an investor’s eye. “We’ve done it. We’ve crowdfunded the £2 million we need,” the company now proudly says on its iCancer campaign page. Well, at least there are some happy endings.

About Nishi Viswanathan: Nishi is a medical doctor turned entrepreneur and MBA graduate from UT Austin. She provides consulting services to life science startups helping them with their marketing, business development and fundraising efforts including writing executive summaries, creating pitch decks, refining business plans and putting together go-to-market strategies. Contact her at nishi dot viswanathan at utexas dot edu for a free initial consultation.

 

2 comments

  1. Good overview. Two elements not discussed, but critical are the awareness and adoption crowdfunding drives. When you get a stadium full of doctors, healthcare executives, investors, and patients who care about your idea to watch your video and review your offerings for 2+ minutes each, great stuff happens. While our projects raise about 6k on average, the raise 30x tht off site, get two or three new partners,news stories, and of course lots of interested patients involved

  2. Mory says:

    I think a certain reluctance in using these platforms is the fact that in many ways you are exposed to the public. Sometimes companies even have IP or ideas that they invested time and money. So for them to go public, is not always the best route. The question is what model could those companies use and still protect their assets?

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