Crowdfunding: Want $11.3 million for Your Life Sciences or Technology Startup?
Once upon a time, scratching up funds to power up a startup business was a fairly predictable path. One got a great idea (or thought it was a great idea), mapped out first concepts toward a prototype, and then hit up the three “Fs” – family, friends or fools – for the initial cash to finish up the prototype/concept. Then it was on to find the first customer and then go passionately after venture capital, where reality struck in the form of complete and total rejection. After a few iterations of this painful process, the startup secured seed funding through angel investors or government grants, and then – now a bloodied entrepreneur – the cycle with venture and /or other capital funding went forward, this time with more measured success and expectations.
At least that was the way the Boomer generation did it.
Today, Millenials/Generation Y and a new generation of entrepreneurs may seek their seed funding for a startup through online “crowdfunding.” The present means of crowdfunding is to post up a call for funds through a portal like Kickstarter or Indiegogo, where a donation model exists where people can donate money for no return or for future discounts or early access to new products.
A more promising form of Crowdfunding is appearing in a second equity or investment model that requires an actual formal investment in a company or individual pursuing the development of a project. The Crowdfunding phenomenon occurs when members of the assembling crowd receive an ownership interest or equity stake in exchange for the investment. This second model of investment was made possible by the enactment of the JOBS Act of 2011, although the Securities and Exchange Commission (SEC) has yet to publish (as of May 2013) the formal regulations governing these types of investments.
Excitement among entrepreneurs and potential investors remains high, so the forward-looking folks at the Indiana Health Industry Forum (IHIF) and Barnes & Thornburg hosted a luncheon presentation May 21 to profile it.
On deck was B&T Life Sciences partner Todd Vare; Marcus Chandler, a long-time partner and entrepreneur leader at B&T; Joseph Trebley of the Indiana University Research and Technology Corporation; and Dr. Samuel Wertheimer, managing director of Poliwogg in New York.
Their thoughts? Crowdfunding is an answer to the fact that many biotech and life sciences startups cannot find seed funding through traditional resources like university funding or specific government grants. Federal SBIRs (Small Business Innovation Research) have been substituted and the result, according to Dr. Wertheimer is “it’s hard to get that first money in the door” for a biotech startup.
The IHIF/Barnes & Thornburg panel referenced the Pebble Technology e-Watch success story on Kickstarter, where several engineers hoped to raise $100,000, with a minimum of 1,000 people “investing” $100 each. The “investors” would then receive the first watches when they rolled off the assembly line. The actual result? Through Kickstarter the engineers raised $10.2 million from 68,929 individual “investors”! That’s a LOT of watches.
Even the JOBS Act may, as Marcus Chandler noted, “take the handcuffs” off of Crowdfunding, it may also create what he called “goofy funding” that will potentially inhibit future fund-raising from more traditional resources.
The group advised those in attendance to look for more engagement from traditional institutions and even universities, who are expected to take advantage of potential ease of investment without jeopardizing an organization’s non-profit status.
Other professionals laud the potential of startup funding through Crowdfunding, but as Genetic Engineering & Biotechnology News points out, several perils and pitfalls exist for future Crowdfunding opportunities. These include high fees, potential loss of confidentiality (a death knell in the competitive world of biotech), high regulatory burdens and the problems associated with having a large group of shareholders in a semi-public setting.
The upshot? Crowdfunding will likely offer some highly innovative options. As Dr. Wertheimer concluded, the process will find and fund “investible companies with a reasonable chance of surviving in a very difficult space.”
By Michael Snyder, Managing Principal