Funding is the lifeblood of all start-ups. You may be fortunate to generate revenue early through sales, but in the capital-intensive, regulation-heavy industries like biotech early funding often has to be secured from other sources. There are many possible avenues for financing, both dilutive and non-dilutive, for example, loans, convertible debt, equity, grants, etc. These are essentially top down approaches. The ubiquity of social media is providing a new bottom-up opportunity – crowdfunding. This post will provide an overview of crowdfunding websites which might offer a source of dilutive or non-dilutive microfinancing capital for the entrepreneur.
Crowdfunding is defined in Wikipedia as “the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the internet to support efforts initiated by other people or organizations”. Leveraging a network to raise money has traditionally been used to support charitable causes. The emergence of the web as a distribution platform has exponentially increased the number of potential donors that can be reached. This rise of web-based social networks has led to the subsequent expansion and divergence of crowdfunding, with dedicated sites to fund everything from making movies, investing in bands, supporting social action, and to fund businesses.
Using crowdfunding as a source of equity finance for businesses could break new ground because government regulations in many jurisdictions often restrict the financing models available for small private for-profit enterprises. For example, in the US there are three main regulatory obstacles that prevent crowdfunding as a mechanism for equity investment: (i) a limit of 499 investors before a private company has to disclose its finances; (ii) an investment is restricted to “sophisticated” investors, i.e. those with substantial personal funds; and (iii) a concern that removing these restrictions will expose unsuspecting investors to fraud. However, recent correspondence in the US between Mary Shapiro, the Chair of the Securities and Exchange Commission (SEC), and Darrell Issa, the Chair of the House Oversight Committee has indicated that the authorities are considering revising the decades-old regulations in light of crowdfunding initiatives.
For more insight into the potential impact of the SEC announcement see the post on Ross Dawson’s blog. And for a perspective on how government regulations are inhibiting innovation and entrepreneurship in Canada, see the recent excellent post from Mike Volker, a Vancouver-based angel investor.
The following table provides an overview of select crowdfunding websites that may offer the (bio)technology entrepreneur a source of finance.
It is clear that the structure of the financing models described in the table reflect the regulations of the countries where these crowdfunding companies are based; however, there are also mechanisms to maximize the “friends and family” concept to leverage the network effects of online communities created via FaceBook, LinkedIn, etc. This funding avenue for start-ups is set to explode in the coming years and it will be interesting to see what new financial business models emerge from the convergence of web-based crowdfunding and evolving government regulations.
And how will this affect biotech start-ups? Debt financing offered by Cofundit, or loans/commercial paper as described by 40Billion would be unlikely options. Would ProFounder’s investors be happy with the wait for a potential revenue stream in potentially a decade or more? And will the equity investors of GrowVC, Seedups and CrowdCube fund capital-intensive industries, with numerous web-based enterprises competing for their dollars?
I believe that crowdfunding has potentially two distinct constituents: investors focused on financial return such as Angels, VCs and other “sophisticated” investors; and investors looking for a social return on investment based on the “venture philanthropy” model championed by disease-focused foundations such as the Alzheimer’s Drug Discovery Foundation. In both cases, I believe that biotech and technology start-ups will benefit from access to these expanded sources of capital.
Have you raised money through crowdfunding? Or do you consider this avenue as a viable financing option? Please share your thoughts by commenting below.
For those interested in learning more about crowdsourcing mechanisms to support start-ups have a look at these sites:
GoBigNetworks – the biggest network for startup opportunities
WebEquity - WebEquity is a community site bringing together entrepreneurs with business ideas and anyone willing to work on an equity and/or revenue share basis to make them a reality.
Foundrs – recruit great co-founders
For those interested in learning more about crowdfunding check out these additional sites:
KickStarter – a new way to fund and follow creativity
IndieGoGo – the world’s largest global funding platform
Sellaband – where fans invest in music
RocketHub – your creative launchpad
Quirky – social product development
Pozible – crowdfunding creativity (previously Fundbreak)
Fansnextdoor- platform for all creatives to promote and fund their projects together with their fans
Cofundos – community innovation and funding
New jelly – a crowdfunding site that allows talents to showcase their work, goals and dreams
Start Some Good – igniting ideas, investment and impact
PeerBackers – crowdfunding big ideas
Invested.in – raise money, reach goals, build community