The pound of the crowd

C&I Issue 11, 2016

Crowdfunding has become a familiar route to market for innovative products. It’s simple – have a great idea, and offer to give your product, once it’s ready, to people who chip in to fund its development and manufacture. The process usually involves a crowdfunding platform website like Kickstarter and Indiegogo - and a lot of PR and marketing. The lucky few will go viral and raise huge sums. Others might raise nothing at all, and the inventors’ dreams crumble to dust.

But what about starting a biotech company? If the company is looking to develop a new medicine, reward-based crowdfunding is unlikely to be appropriate. That’s because medicines can never simply be given away, with only a tiny minority making the clinic even after years of painstaking clinical trials, and even then they are likely to require a prescription. The answer may lie in equity-based crowdfunding, where backers are given tiny slices of the company. This model has been possible in Europe for some time, and in May 2016 was legalised in the US, too.

Crowdfunding has been applied to everything from consumer goods and breweries to music and movies. However simple the language they use, it’s not as simple as going to Kickstarter and funding a cool coffee pot, backpack or gadget charger, where you are likely to get a product in return very quickly. Equity is a much longer term play.

Investors also need to beware. ‘There are numerous examples of crowdfunding campaigns raising huge sums for products that sound appealing but are impossible to make as they break the laws of physics,’ says Lysimachos Zografos, CEO of Edinburgh-based biotech, Parkure. ‘It’s important to be really clear about what you are doing and how, and that everything you are saying is a future projection and not a fact,’ he says. And it’s even more difficult when raising funds for a drug development project, as the timelines are so long. ‘Your investors have to be aware of that. It’s a fine balance between selling your idea, but not over-promising.’

Explaining a biotech’s vision can be hard, even to angel investors, when asking for seed capital, says Kyle Montgomery, partner at Clarkston Consulting. ‘More sophisticated venture capital firms have teams of PhDs and MDs to evaluate projects, but this is very different from the consumer-grade investors in the crowdfunding space. It is harder to get the traction you need in a broad enough population to make a meaningful impact.’ 

A low cost of entry can be an advantage, though. ‘From the consumer perspective, $30 is maybe a dinner out, it’s not writing a cheque for $10k,’ Montgomery says. ‘They’re only getting a micro-portion of equity back for that, but they are willing to put money towards a cause they think will wind up with a good outcome.’

Antony Evans, CEO at San Francisco-based plant biotech company, Taxa Biotechnologies, believes equity crowdfunding is preferable to a reward-based campaign for science-based projects, and a new breed of platforms are now available to facilitate these campaigns that are not suitable for the big reward-based sites.

‘There is high uncertainty in any scientific endeavour – or it’s not research,’ Evans says. ‘Reward crowdfunding works well if the technical risk has been eliminated because there is a working prototype, and capital is needed to scale up a new factory. With a biotech the risk is “does this work?”- so reward crowdfunding isn’t a great fit. But equity crowdfunding has huge potential.’

Evans speaks from experience – his company has already done both, with a reward campaign, for a glowing plant on Kickstarter, before equity crowdfunding became permitted in the US. ‘We raised just under $0.5m, in 2013,’ he says. ‘Enough money to do an initial angel investor round as we had shown demand for the product.’

Equity crowdfunding was chosen for the second campaign, Evans says, to give early backers the opportunity to be an equity investor too. Was it easier because they had already done the reward round? ‘Yes and no,’ Evans says. ‘It was harder because equity crowdfunding is a new thing, and it turns out it’s quite different. Reward crowdfunding is more of an impulse purchase; with equity crowdfunding, you are looking at a much more deliberate decision-making process.’

The equity round, which closed in early August 2016, will fund continued R&D on their products, including a fragrant moss, engineered with the patchouli synthase gene, as a natural airfreshener. ‘Our expectation is that this will be sufficient funding to ship the first products that we’re making,’ Evans says.

It is only recently that any biotech or healthcare projects have started to appear on any of the big crowdfunding sites, and even then it’s only those projects, like Taxa’s glowing plant, that have some direct-to-consumer element. In healthcare, this is rarely the case. ‘The patient’s not really in charge,’ says crowdfunding platform, MedStartr’s CEO, Alex Fair. ‘On the other hand, the doctors, partners, institutions and investors want to follow the patient’s lead, as if it’s not widely adopted it’s unlikely to get cashflow positive.’

Edinburgh-based Parkure successfully used equity-based crowdfunding to get started. It has its roots in a fruit fly model of Parkinson’s disease developed at the University of Edinburgh, UK, initially sold as a contract research product, but they felt it had potential to be more of a standalone operation. ‘The angel investor scene is not so good for therapeutics in Scotland so there was no local source for seed funding,’ Zografos explains. ‘Crowdfunding was suggested as a joke, but we ended up taking the idea seriously.’

For equity-based crowdfunding, it’s important to have people on board who know how to read investment agreements, which is not as straightforward as it sounds, Zografos adds. Choosing the right platform is also important. ‘We ended up going with a company based in Scotland, and I believe we were their first successfully funded company,’ he says. ‘If you go with someone small, it might be easier to extend the deadline or customise the agreements, whereas with a big platform you will have to take what they offer.’

Parkure raised £75,000 in late 2014, giving away about 8.5% of the company’s equity, with the promise of funding from a Royal Society of Edinburgh enterprise fellowship and a grant from the Scottish government. ‘We managed to get enough money for the first year, with crowdfunding matched by Scottish Enterprise, and we then managed to raise institutional seed funding to continue,’ Zografos says. ‘About a third of the investors were doing it because they thought it was a nice thing to do, a third as a way to give money to Parkinson’s research, and the rest were interested in taking a punt in a biotech company.’

Zografos adds that it’s important not to overinflate the value of the company, which can be tempting, but can cause problems when trying to do additional investment rounds later on. ‘The company was valued at £800k, based only on money spent on the project, and we didn’t inflate the amount at all,’ he says. ‘This helped us gain the institutional investment, as they have told us that had the valuation been higher they wouldn’t have given us the money. It was a good choice to go for a more reasonable valuation.’

There is another advantage in a crowdfunding campaign for a therapeutic idea – it provides a tangible way for patients and the loved ones of people with a disease to support the research. Montgomery says that such people are often well aware of advances in the field, and may well want to get even more involved than simply writing a cheque or taking part in a sponsored event. ‘You’re not just reaching the average consumer investor, but people who might have an interest or a direct link to the outcome that this biotech is trying to achieve.’

Evans believes creating a successful crowdfunding campaign is counterintuitive to a scientist, and it will require assistance from marketing experts. ‘It takes a lot
more planning than people think,’ he says.

‘People see campaigns that have gone viral, and think all you have to do is have a good idea and pop it up on a web page. In fact, all successful campaigns have an immense amount of preparation behind them.’

Selling the passion is one thing, but telling the science story and how it translates to the profit outcome an investor is looking for is tough. ‘It’s not normally until the Phase 3 clinical stage that the story becomes visible to the wider population,’ Montgomery says. ‘But all the steps preceding that, and the time it takes to get to the US new drug application (NDA), can be insurmountable to people who are asking how long they have to wait for the outcome.’

It is also helpful to get senior, experienced people involved in the team at an early stage. ‘We had someone respected and senior in the biotech field in the UK join the team, and applying for the government grant meant we effectively got proper external due diligence done for free,’ Zografos says. ‘It shows we’re not promising something completely outside the spectrum of reality.’

Crowdfunding allows a company to retain more control than with venture capital, says Hilary Clarke at ShareIn, the platform Parkure used. ‘You can keep a majority share of the company, and retain creative control of the project,’ she explains. ‘There are a lot fewer strings attached, and crowdfunding can help them gain investors who believe in the company, want it to succeed and have a vested interest in it.’

Picking the minimum investment is fraught. Do you set it very low – say, £50 – to encourage a lot of people to do it, or higher, perhaps £500, so that only serious investors that might invest again in future are likely to get involved? ‘We went for £500, but we had several people who invested a few thousand,’ Zografos says. It also kept the number of investors they had to communicate with on an ongoing basis down to manageable level, at a shade over 60.

Academic interests

Crowdfunding has even been used to raise money for more academic research. As part of his PhD, Luis Cunha found a native population of earthworms living inside a geothermal field on the volcanic Azores islands in the Atlantic. ‘The genome complexity was so astonishing it was too expensive to sequence it, and we only got a draft genome,’ he says.

He moved to postdoc at the University of Cardiff, UK, and his research took a different direction, but he later spotted the opportunity to compete for a Pacific Biosciences grant to tie off that loose end. Although they didn’t win the competition, PacBio helped them raise funds via a crowdfunding campaign on the website,, to pay for the sequencing.

There was a further, unexpected benefit – the campaign generated interest from other researchers around the world, and several proposed collaborations, including one with a cancer researcher. ‘If I’m able to provide data with this simple crowdfunding project to different areas, it’s amazing,’ Cunha says.

There are still doubts among the scientific community about crowdfunding, Cunha says, not least because it is only really feasible to raise relatively small amounts of money – his campaign raised about $5000, from 74 backers with an average donation of about $70.

‘With crowdfunding, the public join you on the journey of your research,’ he says. ‘But it is a lot of effort, and it’s almost a full-time job in the last days of the campaign. I would do it again, but not in the near future, as it took up so much time.’

Taxa’s Evans believes that the combination of transparency, speed and the non-financial benefits, from market validation to early access to distributors to outreach to the public, are all good reasons for crowdfunding, particularly in a climate where scientific funding is being withdrawn. ‘There is talk of a “postdocalypse”, where government research funding is drying up, leading to an abundance of highly skilled people who are not able to continue working in that field,’ he says. ‘I think crowdfunding has the opportunity to replace some of that.’

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