By Julie Nixon
The panel-led workshop looked at what crowd funding actually is and how the financial regulatory frame work affects this financing model, before looking into the possibility that crowd funding might solve some of the funding difficulties experienced by early stage life science companies. The experienced panel included Karen Darby and Simon Dixon who have both established their own crowd funding platforms (CrowdMission and BankToTheFuture respectively) angel investor Nelson Gray.
For the few of you that may not be aware of it, crowd funding has recently become a hot topic, the term being used to describe a variety of methods by which entrepreneurs can pitch their ideas via an online platform to a large network of individuals. In the case of the most attractive pitches, individuals may then choose to pool their financial resources to raise money for the entrepreneur – i.e. sexy pitching! Supporters view crowd funding as a means to bridge the financing gap faced by many early-stage businesses. Indeed, Nelson Gray even suggested that crowd funding might be suitable for 95% of start-ups.
To put it simply, equity-based crowd funding is a way in which a group of individuals invest money and receive shares in a business. However, there remains a major elephant in the room - depending on the precise model used, issuing shares this way remains subject to strict regulation by the Financial Services Authority. Whilst these regulations have been designed to protect investors, Karen Darby argued that the current “one-size-fits-all” regulations are not fit for purpose where crowd funding is concerned.
Interestingly, Karen is currently working with Simon Dixon to establish the UK Crowd Funding Association in order to build a framework to establish reputable crowd funding platforms whilst attempting to meet the growing appetite for finding alternative mechanisms to raise capital through selling equity.
Andy Porter of Antoxis questioned whether using a crowd funding model could have a negative effect on future investment by business angels or venture capitalists – for example, the potential logistical complications of buying out say 150 shareholders could easily put potential investors off a potential deal. Therefore, the critical lesson is that before embarking on crowd funding of any type, entrepreneurs must ensure that they have included proper provisions in documentation to give the right to force shareholders to be “dragged” along in any prospective sale. Another alternative is to perhaps only award non-voting shares to those who make small investments in the business.
Life science businesses are known however for being costly and taking years before investors see any return. Many rounds of investment are often required seeing the shares of early investors diluted. How does this fit with the crowd funding model? The panel was firmly of the view that every entrepreneur needs a great pitch to ensure the investors are fully aware of what they are funding - of course, good advice no matter what the sector. Not every individual is driven by the prospect of a quick or large return, according to Karen Darby. Certain individuals may be motivated by a desire to make a social impact and appreciate the importance of keeping a company pursuing cutting-edge science afloat until it is ready for more advanced forms of funding (via angel syndicates or venture capital investment). There is also the prospect that some wealthy individuals may have a personal interest borne out of personal experience of ill-health within their social circles that would drive them to help fund the development of research in a particular disease area.
It’s important also to remember that most crowd funding platforms are not trying to decide what is a good business idea - they will leave the entrepreneur make a compelling pitch to investors. Therefore, this method of raising finance is not trying to appeal to those that are more comfortable investing via the traditional model. And, of course, business angel syndicates generally “don’t do drugs”! On that basis, it’s possible to envisage the evolution of a niche crowd funding platform aimed specifically at life sciences, built up by a public which is keen to see socially-driven projects succeed.
All in all, an informative and thought-provoking afternoon. As ever, the funding gap remains and, in this area in particular, society can only benefit from increasing the levels of collaboration between innovative minds towards the development of a solution.
What are your thoughts? Do you feel that crowdfunding might be the answer for the funding of early-stage life science businesses? Or do you think that the challenges of having a lengthy route to market and relatively high development costs will ultimately strangle the model? Let me know in the comments below.