by Dr. Sunni Patel, medeuronet clinical scientist
There is no denying that crowdfunding is a ‘buzz-word’ with increasing popularity in the investment world. It offers individuals with sufficient capital the chance to diversify their portfolio across companies; a luxury previously reserved for high-net worth individuals.
Following the 2008 global recession, the medtech industry has been slow to recover, coupled with ongoing sluggish economic growth in certain EU countries, the competition for securing VC and angel-investor funding has never been more fierce.
With financial constraints and discerning funders, the climate has created opportunities for crowdfunding to offer funding pots not previously available in the medical innovation arena.
Crowdfunding has now evolved as a viable opportunity, moving beyond a passing phase of funding artists to what is now a multi-billion dollar industry. It has even been suggested in several financial circles that crowdfunding could transform the way new and growing companies access finance worldwide.
Crowdfunding has gained enough traction to transform the way we approach and view new-business finance. Whether it is through a peer-to-peer lending model, a rewards-based model or an equity finance model, the general public – a cooperative as it were, are fast becoming the port of call in answer to a lack of appetite for risk among traditional finance institutions and VCs.
Quite simply, many inventors and entrepreneurs struggle to secure funding through traditional means, as their ideas just don’t match up with what a VC is looking to fund. Many VC portfolios are diversified to realize higher returns with higher probability and risk projects than many of these small devices can offer. This usually drives VCs to focus on projects and devices that require a greater need for cash with a stronger likelihood for a quicker and profitable exit.
Crowdfunding may appear to be novel but is not actually a foreign concept to healthcare companies. Since its approval in April 2012, the JOBS (Jumpstart Our Business Startups) Act was the first step toward letting the general public receive company equity in exchange for funding, though it won’t be allowed for non-accredited investors until the SEC publishes the final rules. Crowdfunding now provides the chance to aggregate public funds to provide a vehicle for medtech development.
What is unique about this aspect of funding is that it now provides an opportunity to leverage and secure funds for medical device inventors. This is key when it comes to ideas that do not fit within portfolios of larger companies.
As a relatively new concept though, there are very few crowdfunding sources solely focused on healthcare, although this is changing. Thanks to the successful rise of crowdfunding, innovative medtech inventors and entrepreneurs are now able to approach various healthcare and medtech sites such as MedFundr, MedStartr, HealthFundr, and B-a-MedFounder.
Whether this funding alternative can prove to be a success in the industry will depend on whether it can deal with dilution and can produce successful exits.
To understand crowdfunding better, Jared Iverson, one of the co-founders of Healthfundr discusses how crowdfunding is providing a valuable financing tool for medtech innovation.
About Jared and Healthfundr
Jared started his early career in clinical research with a start-up pharmaceutical company looking at trans-dermal drug delivery. Following that he worked with a CRO and pursued a degree and career as a securities attorney.
Jared notes that “it was actually during my time as an attorney that I recognized a large opportunity arising for early start-ups in the healthcare space to acquire capital in a more efficient way”.
The legal climate has fast been changing over the last several years and consequently paved the way for people to become easily aware and invest in start-ups. The market is now becoming readily accessible and Jared saw an acute need for health start-ups to find a medium to help them venture past the “valley of death” trying to secure second round funding following seed funding.
His personal passion for the health space and where he believes there is a greater impact of innovation have been driving factors behind the creation and development of Healthfundr.
The company has essentially been developed as a platform to connect investors with high quality, promising start-ups. “What makes us unique is that we only help companies raise capital that have existing fundraising traction with good lead investors”.
Although it is a misconception that crowdfunding sites offer capital to anyone, Healthfundr shows that this type of financing is sophisticated. It isn’t a place for second-tier companies to get “dumb” money from uninformed investors. Jared illustrates that they aim to highlight and showcase “cream of the crop” health startups that world-wide investors can get access to.
Recent changes in the economic and legal landscape have brought and raised a lot of attention to this type of funding, but crowdfunding as known, is not a new concept.
Interestingly, Jared feels that worldwide cultural shifts have created and driven an increased demand for crowdfinancing. It appears to him to be much bigger driving forces than economic alone. With the evolution of online marketplaces becoming commonplace (Airbnb, Uber, Amazon, and e-Trade to name a few), there is a huge cultural trend toward transacting online. Jared highlights an important one currently in the US for instance, on the strong Main Street vs. Wall Street argument that is suggesting that investing is not just for the ultra-wealthy and –connected.
What has been the initial response of the medtech industry to crowdfunding?
It is important to note that the term crowdfunding can be considered very polarising, as it suggests an inferior alternative as opposed to a supplement to VC funding. Instead crowdfunding should be viewed as leveraging technology and internet scale to make allocating private capital funds more efficient. Essentially it is not an either/or proposition.
medeuronet has garnered that Healthfundr allows entrepreneurs, that have already acquired smart, sophisticated funding from angel investor networks, to use the site to supplement their existing funds and use it as a ‘signal amplifier’ to reach a greater audience.
It appears that entrepreneurs love this concept. Jared feels this is because of the ‘empathetic’ nature to this field; all entrepreneurs can relate to and also acutely feel the pain behind the time and energy taken to raise capital, as it is such a difficult and varied process. It seems that crowdfunding can eliminate some, but not all, of that frustration, making it generally very well received.
The trend is such that inventors are becoming very good at discerning the value that crowdfunding sites can bring. Jared points out an important trend, that money is now more accessible compared to a time when traditional VCs were the only major sources and thus dictated terms. Therefore, crowdfunding now allows inventors to assess the value (mentorship or marketplace value for example) that the capital brings.
Healthfundr offers what it suggests to be the best angel networks, great VCs and serial investors from the health focused market place. This allows them to offer the most valuable last 25% of funds raised; by essentially aggregating the top minds in health innovation, entrepreneurs can connect with a strong network of strategic partners, employees and consultants.
Jared talks of a recent example where they recently worked with a company that designed a diagnostic at-home device for sperm analysis. With the huge market and interest in fertility management, the company had incredible lead investors (Life Science Angels) but needed to acquire the last 20% of funding. “Using our marketplace of experts and our strong investor network, the company was able to acquire the final portion of its round”.
Crowdfunding works by investing into a single purpose entity (usually a LLC) which acts as the sole new shareholder on the entrepreneurs table. In the case of Healthfundr, they aggregate the funds and manage it by getting a carried interest. “Essentially, we are not a broker dealer so as to take a percentage of the capital raised. Instead we get 15% from the dollar gain following a successful exit” notes Jared describing how his platform operates.
Without fear of stating the obvious, the device; Jared explains has to “illustrate a good concept that addresses a need and can appear to be viable in an ever-changing healthcare space”.
From how the process is described, crowdfunding is a virtual boardroom as it were, becoming a marketing exercise in itself. There has to be curb appeal for small online investors to make them reach into their funds. Jared notes a growing interest within the consumer marketplace on digital health companies that have resonance with one’s personal life and impact.
The product pipeline can be key too, whether there is clinical data and ready for 510K approval or if it is prototype stage will determine its success. Other factors that many crowdfunding sites may consider are the strength of the team and company, if they have relevant domain experience and whether they have had previous start-up and exit experience.
“Some key advice I give to entrepreneurs is that you should take the time and effort to find reputable lead investors that have negotiated their terms.” Jared feels this is important so that online investors can look to the initial investors and be reassured that due diligence was carried out. Also, as online equity investing is so new the model relies good offline validation that should be carried out beforehand.
Advice for inventors or entrepreneurs considering crowdfunding
Other than some things discussed above, it is vital to be thoughtful, well prepared and make sure your proposals look good aesthetically with decent pitch deck and videos. It involves good story telling; be prepared to sell your vision and present it well.
Jared also advises on considering an online profile of your company when using platforms like HealthFundr. This will allow inventors to utilize the power of the internet and take advantage of the scope of the audience it can potentially reach.
What is the future of crowdfunding?
It is not hard to realize through the media and talking to people like Jared Iverson, that it is still very much early days for crowdfunding. However, with the traditional investment market maturing there is a big boom expected in people participating and investing too.
Under a bigger umbrella, private markets will be more efficient and transparent (VC firms, angel firms) will have an online component. Fundraising will have a stronger online component, which Jared strongly feels will allow for “efficient and objective investment decisions to be made”.
Online platforms could have strong staying power and will play a major role, if their successes are evident and consistent. This, of course, doesn’t displace offline investment opportunities, but their efforts could well be supplemented, complemented and enhanced through online marketplaces.
This has several advantages, for instance funding rounds will close much quicker, due diligence will be done efficiently and promptly with a worldwide database and panel of leading experts that will allow for a common framework.
Jared ends on an important conclusion: If private capital formation continues to become more efficient then there has to be an online platform in order to reach the scale and capacity of existing public markets.
It seems, that with current economic, legal and cultural factors enhanced by innovations in the health space to meet growing populations and health needs, that crowdfunding could last a long time. Founders like Jared, could therefore help to make crowdfunding more available, standardized and regulated in the financial investment sphere.
Medtech Crowdfunding Sites
- Healthfundr: Healthfundr is an online platform for investors, startups and experts. It focuses on making investing in and building health startups more efficient, transparent and accessible.
- Medstartr: Healthcare innovation funding for patients, doctors, and companies. Also offers innovation partnering services and a mentoring service.
- B-a-med-founder: Crowdfunding platform specializing in medical devices. They welcome medical device ideas in all stages of development.
- AngelMD: Funding platform for medical startups, physicians and life science investors. Features biotech, medical device and digital health companies.
- Poliwogg: A financial services firm with an online investment platform, enabling accredited investors to access and directly invest in innovative healthcare and life sciences companies. You can acquire equity in these companies through the Poliwogg Platform.
- Makerstaker: a web portal allowing investors to make equity and non-equity investments in medical device and Health start-up businesses. MakerStaker focuses on medical and technical innovations to bring more than just fiscal resources to an entrepreneur.