Crowdfunding – New Source of Capital for Medical Industry

Wilson, Sonsini, Goodrich, and Rosati 2013 Medical Device Conference (www.wsgr/news/medicaldevice.com) focused on understanding the challenges that Medtech startups encounter in the current environment, and the emerging strategies to respond to these challenges.  It was heavily attended by industry CEOs, venture capitalists, industry strategists, investment bankers, market analysts, and life science industry professionals.

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Below are some highlights from panel on crowdfunding.  Crowdfunindg is emerging as a source of potential new source of capital for early stage and emerging growth companies.  The panel was moderated by Phil Oettinger, partner at WSGR and the panelists included Andrew Farquharson, Managing Director at InCube Ventures, Scott Jordan, Partner at S. Jordan Associates, Greg Shearer, Managing Director at Healthios, and Ben Lee, Director of Business Development at CircleUp.

Oettinger gave a background on Crowdfunding.  He also discussed impact of JOBS act that is expected to enable advertising for private investment offerings and allow unaccredited investors to participate in online equity crowdfunding.  Thus far, crowdfunding has not lived up to the hype of being a startup panacea.  It caps an amount an issuer can raise to $1M, in any 12-month period and caps the amount a person can invest in all crowdfundings over a one year period at 10% of annual income or net worth of the investor.  Shares issued in crowdfunding transactions are subject to a one-year restriction, and there are other restrictions that render non-US companies ineligible to participating in crowdfunding.  Crowdfunding also must be done through a registered broker-dealer or registered “funding portal”, who cannot solicit investments and law requires extensive due diligence, including background checks on management and large stockholders.  None of the challenges however, have dampened the enthusiasm.  SEC has already stated that equity crowdfunding portals are exempt from certain restrictions and more changes are on the way.

Scott Jordan is an accomplished life sciences business development and investment banking professional with over 20 years of corporate experience in negotiating strategic corporate alliances, securing international licensing agreements, building national sales teams, and contributing to successful product development, approval, and launch.  In partnership with Greg Shearer, Managing Director at Healthios Capital Markets, and CrowdConnect, Jordan and Associates, launched Healthios Xchange fund, with an aim to assist emerging growth healthcare companies raise capital from accredited investors, and non-dilutive financing from foundations.  It offers three large value propositions, said Shearer.  Open access eliminates selection bias and does not curate the deals going on the site.  “Crowd” anchors the continuum.  H/X scoring based on sophisticated algorithms, makes it heavily data centric, similar to LinkedIn.  Healthios charges fees to companies that raise money on its portal, except in certain cases where it offers carry-free, fee-free feature allowing investors an opportunity to directly invest in companies, eliminating transaction expenses.  The fees will likely fall in the 5-10% range.  The fee structure will be different for non-profits.  Each company gets a company pitch page.  Several features including e platform button, e signature of docs, e regulatory assessment etc., enhance ease of use.

Ben Lee, a developer of innovative teeth whitening products at GoSmile, and founder of TaskRabbit, an online services marketplace, joined CircleUp, which offers consumer companies an access to funding through passionate, sector focused investors.  “Very simply, crowdfunding is a numbers game and it offers an opportunity to reach out to large number of people, who are looking to invest”, said Lee.  CircleUp has launched a highly active, fast growing portal and has gained considerable credibility.  Lee said, “We are 100% focused on branded consumer products” where there is little institutional investment.

Prior to his current role at Incube Ventures, Andrew Farqharson, a serial entrepreneur had co-founded Operon with no venture capital and sold it for $150M.  He also had launched a company in microfludics, Innovadyne, and had held several roles in research operations at Genentech.  At InCube, with Mir Imran and Talat Imran, Farqharson co-founded VentureHealth, a crowdfunding portal, to enable physicians and other accredited investors to invest in “compelling biomedical inventions”.  Farqharson said, this emergence of crowdfunding is very exciting and enables entrepreneurs to be less dependent on VCs, while it unlocks a lot of latent capital, and also gives investors more degrees of freedom.  Unlike other equity crowdfunding portals on the panel, VentureHealth has adopted a carried-interest business model.  They do not charge fees to the companies that raise capital but charge the investors; just like a venture fund.  In this model being driven by carried interest, they make money only if their investors do.  Clearly, they have an incentive to only support the most promising companies, unlike many broker/dealer sites that may have lesser interest in screening for quality, as their primary incentive may be to raise capital for as many companies as they can.  It will be interesting to see which approach holds more long-term promise.  My initial thoughts are, if I, as a rather naive investor, were to risk my money, specifically in the complex class 2 and class 3 devices, with many regulatory, reimbursement, and marketing challenges, I would prefer to risk it where some prior due diligence is done by seasoned and serial entrepreneurs like Imrans and Farqharson.  Explaining the success of InCube Ventures, Farqharson said, despite the challenging environment, they have had 3 exits this year.  BodyMedia was acquired by Jawbone, NFocus Neuromedical was acquired by Covidien and most recently Spinal Modulation was acquired by St. Jude.  Exists led to $700M+ in 2013, said Farqharson. They are actively screening investors.

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