Despite some of the reports showing an increase in VC funding, the number of deals and the number of early stage VC firms are contracting, there were 1,022 active firms during the tech bubble year of 2000, and just 462 active firms were left in 2010. Sure there are some stories about companies that have been able to raise considerable amounts of money, take for instance Naurex. But those stories are starting to get few and far between. If you look at VC investment over the past quarter, almost all of it went to companies with existing VC investment, very few went to new companies. The amount of money for first-time company financing fell by 60% in the first quarter to $120 million.
There are a few reasons that this contraction is happening. First the economy, it sucks. VC firms have exhausted the funds they raised in 2008, and facing poor returns, it is unlikely that they are able to go out and raise new funds. Second, the Affordable Care Act may lead to increased funding for Health IT companies, but uncertainty about reimbursement does not help startup biotech and biomedical companies. And finally, this is not venture philanthropy, it’s a business. That means they need to invest in companies that can quickly provide a ROI.
Quickly is not an adjective I would use to describe the development cycle of the biotech industry. Last week at the BIO convention, Steve Burrill announced that the average to market is 15 years and > $1B. It is a very long, expensive, and risky proposition for investors. Our companies need to raise considerable capital, and if that capital is drying up or becoming more risk adverse and investing in later stage companies. We need to find other ways to fill that gap.
I talked in an earlier post about the need for the government to step up and fill that gap with programs and grants like SBIR/STTR, at both the state and federal levels. Today, I want to talk about another possible source, crowd funding. I know, I too am very skeptical about the promise of crowdfunding, especially for the biotech industry. Just take the journey with me.
First, if you don’t know about crowdfunding, it is the process in which individuals go on the Internet to donate, loan, or invest in a new company or project. Sites like Kickstarter and Indiegogo have become platforms for making these investments.Often, these campaigns star some entrepreneur who describes his or her new business idea, asks for support, and offers something small in return, like early release of their merchandise or some other kind of recognition. These are projects that friends and family might have financed before, or very early Angel.
Crowdfunding is growing according to Massolution, a crowdsourcing consultancy, polled 308 crowdfunding platforms It found that in 2012 more than 1 million successful campaigns were held, raising $2.7 billion worldwide. Globally, crowdfunding grew 81 percent in 2012, compared with 61 percent growth in 2011. What’s more, Massolution predicts that this year global crowdfunding volumes will reach $5.1 billion.
If you quickly just did the math there you would have come to the same conclusion that I did, a lot of people have raised a little money. There have been some widely successful campaigns like the Pebble Watch, which raised $10 million, but the average fundraise is in the thousands to tens of thousands. Now that does not sound like a lot when the vast majority of biotech deals require >$15M in venture capital to get to an exit, and the average is close to $60M.
The JOBS Act opened the door to crowdfunding for biomedical R&D, which has led to a few funding sites focused on our community. There have been some clinical trials financed on crowdfunding, but no biotech I’m aware of has raised big money this way yet. Health Tech Hatch and Medstartr have gotten some attention for efforts to use crowdfunding for health technologies. Fierce Biotech ran a story last month about Bill Gates blessing the crowdfunding site Microryza, who has started funneling cash to dozens of high-risk scientific research programs, including a number of drug development efforts. Another New York-based company called Poliwogg, could end up being the place where little biotech companies raise real money.
I don’t think, and don’t expect, crowdfunding to grow to the point where it will address all of our community’s start-up financing needs, but it is a possible source for funds to cover specific early stage projects, like securing your IP or building out a website.
Finally, there are some things to take into consideration if you are contemplating using crowdfunding for a project. First, you need to have a large social network, most of the funding will come from contacts that you already have or cultivate. Second, you need to have an interesting and engaging presentation, which usually means some video and editing. Just putting it on the web does not guarantee your success. And there are other things to be concerned about, Jordan Green covered his phobias and thoughts last week in the article, Why Crowdfunding Scares Most Entrepreneurs But Doesn’t Have To.
Are you interested in learning more about Crowdfunding and would you attend a webinar? Have you used crowdfunding for a venture? Do you have any insight? Let me know. This is a conversation, not an editorial. Did I forget something, get it wrong or do you agree? Please Comment, Like, Re-Tweet and Share
- Using the crowd to fill funding gap (business.financialpost.com)
- Crowd Funding in the Billions (theceospaceblog.com)
- What should a startup do to prepare for crowdfunding? (strom.wordpress.com)