Over the first half of 2012, there has been a lot of data and news about how the venture capital industry is doing. I’ve written a few drafts of a post on the topic from a biotech perspective but each one has fallen flat because in my opinion the problems in biotech VC land are more fundamental than whether LPs are doling out cash and the public markets are welcoming. And since VC backs much of the translation from research to products outside of pharma, even those of us innovating without venture dollars should be wondering how the next generation of innovation is going to be funded. The following are some of my thoughts on the challenges, lessons learned and potential steps to get all of us back to thinking about the real goal – building value by helping patients.
Capture Value Along the Way – The main exits for biotech investors have historically been the public markets and mergers & acquisitions by larger companies. For most biotech companies, an IPO now offers another financing rather than an exit and the markets are looking for more mature companies than years past. M&A has picked up some of the slack but the deals are now structured so that return to shareholders is often delayed well beyond the transaction to future milestones. The impact is that biotech venture fund lifecycles draw out and angels are unable to cash out and reinvest in new opportunities. Since the situation seems unlikely to change any time soon, what can be done to capture some of the value that has been created prior to a formal exit? Is there an opportunity to provide partial exits using a publicly traded private equity (firm or fund)? Develop an active private market for biotech opportunities? (A search of SecondMarket for biotechnology gave only seven companies.) With the significant downsizing of R&D in pharma, is there a way to deploy a pool of pharma funds to keep interesting assets in development and allowing capital to go to newer, riskier ideas?
Align Timelines – Another approach could be to search out investors with a longer horizon. There is a lot of discussion about biotech companies raising dollars from advocacy/non-profits and potentially from crowd funding – essentially getting funds from individuals (not necessarily accredited investors), whether for charity or investment. To set the stage for the next sections in terms of scale of dollars invested, biotech VC invested in the second quarter of 2012 alone was $696,770,700 across 90 deals.
Advocacy groups: An example of an advocacy group that has made a large commitment to funding drug development is the Cystic Fibrosis Foundation, which launched its Therapeutics Development Program in 1997 and has developed a strong pipeline of funded projects. CFF invested approximately $75M into a drug developed by Vertex that was recently approved. To get a sense of how much money can be raised in charitable contributions for development of new drugs, I looked at the CFF 2011 Annual Report. Their model is interesting and doesn’t depend solely on public support but also includes net pharmacy services. These dollars support more than just new cystic fibrosis treatments; CFF provides many other valuable services to CF patients. (The Leukemia & Lymphoma Society also has an active program to support drug development. In 2010, the society invested $8M in contracts in their Therapeutic Acceleration Program.)
Crowd Funding (non-equity): The crowd funding site Kickstarter does a great job of providing close to real time stats (table below; as of 31 July 2012). The seven projects with $1M+ raised were in: music (1), games (3), design (2) and comics (1). Petridish is a more recent crowd funding player that is focused on science. Based on the projects listed as Fully Funded, 23 projects have raised $103,080 via Petridish. A variety of other sites are also looking to fill the niche for science crowd funding. While most are too young to evaluate (data as of 31 July 2012), here are the other sites I looked at*:
- iAMscientist – Eight projects: 3 expired and 5 ongoing
- MedStartr – Nine projects: all ongoing.
- Microryza – Twelve projects: 3 funded ($8,770 total), 7 expired and 2 ongoing
- RocketHub – Sixty seven projects with science in search: 20 funded ($59,522 total), 40 expired and 7 ongoing
- #SciFund Challenge – Seventy five scientists raised ~$100,000 in May 2012
A couple of questions come to mind about crowd funding biotech:
- How do the sites establish credibility about the projects, allowing funders to feel there money will be well spent?
- Will the industry need more infrastructure in these sites to meet the large capital needs?
- How creative can the industry have to get to provide funders with first access to the final product and/or access to the creator/artist?
The portals that enable equity based crowd funding that will come online under the JOBS Act will likely encounter similar issues – and many more as companies then have to manage shareholders, etc.
So What Comes Next?
With cooperative funding sources on the rise (angels, corporate venture funds, advocacy groups and various crowd funding approaches) and the challenges in raising new venture funds, now could be a good time to develop a new business model for “translational investors” to fund the next generation of biotechnology innovation.
*Thanks to the folks on Twitter (@eperlste, @steen1969) who helped identify the crowd funding sites. The data is from projects listed on the given websites as of 31 July 2012.
The Next Element 
Thanks for the interesting post, Laura!
Last night I attended a crowdfunding teach-in sponsored by Gotham Media Ventures in NYC. The founders of several crowdfunding portals, including IndieGoGo and RocketHub, were in attendance, and they fielded questions from an eager audience of 100+ would-be crowdfunders.
Slava Rubin, CEO of IndieGoGo, took the contrarian position in response to a question from the moderator about equity-based crowdfunding. Perhaps you or your readers could help me understand the whether being a contrarian makes sense.
The question was really a concern about the likelihood of securing subsequent rounds of financing from traditional investor types, eg, VCs, after an initial “crowd round.” The usual response I’ve heard in similar forums is that VCs are be loath to go to series B or C because they don’t want to deal with a chorus of 1000 noisy and potentially poorly informed crowd investors. As I said, Rubin took the opposite position and said equity-based crowdfunding would stimulate future rounds. He’s unlikely to comment on your blog but perhaps others can chime in.
(Also, Rubin referred to the IndieGoGo blog for more stats on their successful campaigns, e.g., http://www.indiegogo.com/blog/2012/07/indiegogo-insight-winning-the-middle-game.html)
Great to run into you again on this interesting blog post. My opinion is that getting investors on board is always tough and will be even more difficult if the equity shares are a mess. Still, as Laura said, if I was going with an equity-based crowd funding option then I would work closely with legal team to ensure that subsequent rounds of funding are not overly complicated.
Ethan
I like your question and will take a first pass. From my perspective (funded by individuals not institutions), entrepreneurs need to be cautious about whose money they take. A difficult shareholder, regardless of crowd vs accredited vs institution can make many things very challenging for an organization. If I were going down the equity crowd funding path, I would want to work with a legal team that had experience with diverse investor pools working well together.
Hopefully we can get a VC or two to comment.
Laura
This is a great post and the list of crowd funding portal is terrific. I actually posted a question about this on Quora a few months ago but didn’t get any good answers. The crowd funding model is in style at the moment because of some high profile stories – however, the picture is not as rosy once you look at full picture (here is one infographic about kickstarter success rate http://www.techvibes.com/blog/kickstarters-untold-story-failures-are-big-successes-are-small-and-deliveries-are-late-2012-07-18)
Still, I do believe that there is room for crowd funding portals in science especially for university spinouts but I share the same worries about equity based crowd funding.
Laura – this is a great post. On crowdfunding, I think the issue is more that a) these are really small amounts of money, and b) there’s an exposure risk for a startup company (eg. “fund my research” can come across as seeming a bit desperate which can affect funding from others).
With that said one of the best known crowdfunding sites is Angellist, which works really well for tech and have some biotech companies listed. Perhaps biotech companies will eventually be more active there if they can translate their opportunity to more layman terms. There too- the amounts are pretty small and people tend to be most successful there after having identified a few well known angel “lead” investors
.
In any case, I certainly think crowdfunding is a promising direction with it’s stated challenges. Also am a big believer in advocacy groups working with newcos in a more proactive way.
Thanks Daphne. Some great feedback for the people wondering how investors, particularly VC, might look at equity crowd funding.
(AngelList is a site to connect accredited investors with companies looking for funding and they have a nice system for posting the connections made. Among other things the investments can be searched by stage – with 1279 of 1441 deals listed as seed stage.)
Laura- The continued evolution of matching sources and uses of capital is important. Ideas and people should compete for the allocation of scarce resources.
With that said, I honestly do not view money as the scarce resource. (Yes, it can be expensive and hard to come by, etc.). If we see that almost 20% of the economy is going to healthcare spending, and there are large R&D allocations in both the public and private sector, as well as literally trillions of dollars looking for a place to generate a return, money is out there.
Crowdsourcing: Great. Have at it. Every entrepreneur has to scratch and claw for resources. Use whatever agenda you can including the good feelings associated with curing disease.
But I think the fundamental issue is that healthcare has been a difficult asset class for investors. We need to find a way to do more with less. We need to stop the waste that drains money from worthwhile projects.
If healthcare becomes simply charity (which is enormously important) instead of an attractive place to do business, we are in a great deal of trouble.
Crowdfunding is interesting and perhaps more important to me from an educational perspective. But what really attracts dollars is showing that you can create value with those dollars and provide a return to investors. If we do that, money will seek us out. And there is a lot of it out there.
Don’t for forget about FundaGeek, which is a crowdfunding platform expressly for scientific research and technology. FundaGeek is unique in that it does not follow the “all or nothing” funding model for research projects. To learn more, please visit: http://www.fundageek.com/research
I think there is plenty of money around already to fund research. What needs funding is commercialization. It is taking the compound from the lab to the bench that poses the biggest challenge for small biotech companies. The way we think about the existing models and how they are going to evolve is going to be interesting. So for example non-profit-for-profit partnerships that say take a compound from the lab to through IND and possibly Phase 1 is a starting point with full knowledge that this entity is going to have to partner with big pharma or big VC at some point. Or does Big Pharma form a collaborative crowdfunding platform that it invests a million here and million there depending on how much a small biotech is able to raise from patient advocates etc. I believe that innovative and ingenious folks will find ways to make this new lego pieces fit.
Just on the Kickstarter website and funding for drugs, drug-like substances, and health products are expressly forbidden (just as well, what tchotkes would you offer?) Grrrrr, those tech guys have it so easy.
I’m having a hard time wrapping my head around the mechanics of crowd-funding in general. Seems like its basically Angel investing for the non-accredited investor. Geez, who needs that headache?
I’m with though Laura, what’s a gal to do to traverse that valley of death when traditional funding sources (e.g. VC’s) are going later and later stage. We’re left here sucking wind and competing for SBIR’s I guess.
But I ask you, society–where is the next generation of clinical candidates supposed to come from if we can’t even get these early stage molecules to a first down (I’m really ready for football season).
Smarter minds than me are/have been grappling with this for a while, wish I had some answers. In the meantime, scratch and claw baby, scratch and claw.