Getting Crowded Replay

I’m still sorting things out, so here is a post I put up last January on early-stage funding:

While I am still skeptical about the idea of researchers using crowd-funding to fund their projects (which typically need more than tens of thousand of dollars over at least a year to get results), I am very pleased to report that the project I wrote about last month was fully funded by its deadline. As I wrote in “Shameless Plug”, Dr. Michael Polastri, associate professor of chemistry at Northeastern University, is starting a web-based portal for sharing data and ideas among medicinal chemists to accelerate the discovery of new drug candidates for treating the neglected diseases/diseases of poverty. Through a website specifically for crowd-funding science projects called Microryza (Mike’s page is at Collaboration for NTD), he raised a seed fund of $25K- congrats, Mike, and thanks to all who contributed!  [For an update on the project, see NTD Collaboration Project.]

Given the popular crowd-funding buzz, I wondered what is its potential for entrepreneurs starting life science product development companies, especially those developing products for global health?   In my experience, such start-ups need a minimum of a couple hundred thousand dollars for the essentials: completing convincing proof-of-concept studies to leverage into a real fund-raising round and paying the living expenses of the founder or founders, at least one of whom needs to put full time into the venture. While it helps to have a fully-employed spouse, generous and supportive friends and family, and access to grants, loans, and free advising, the founding team has the major task of finding and convincing knowledgeable investors that it has a viable plan to make and sell a product and to create a successful business that will repay investors in excess of competing opportunities. Of course, global health-oriented companies have the added challenge of educating potential investors on their value, not easy since investors prefer business models that have worked for them before. Call me old-fashioned, but I think the best (only) way to tackle this task is in person and not through the ether.

But, as it is said, there may be an app for that. As I learned last May from a FierceBiotechIT article and a Wall Street Journal blog post, there are now two sites set up to sell shares in life sciences start-up companies to qualified investors. Since the SEC rules allowing the sale of equity in companies via internet “portals” are still pending (the SEC draft rules were released last October), these sites are not really crowd-funding but require potential investors to register and assert they are “accredited investors” under the existing SEC rules for stock offers. The one is Healthfundr, which “makes it easy to discover, screen, and invest in the most promising health companies.” I could not find any information on how successful this group been in raising money for itself or others, but in a December blog post one of its founders stated that they have now figured out their business model they are starting to execute (Schantzen post), not a reassuring comment. More promising effort seems to be VentureHealth since the founders are successful investors who will be evidently also co-investing. The company’s launch press release indicated that it is aimed at angel investors and companies seeking an alternative to VC funding. It also noted the successful raising of $875,000 for multi-million Series B round for Channel Medsystems, a California medtech company, which is nice, if unfulfilling. The WJS article also mentioned a third site, Medstartr (I guess dropping the “e” is required for crowd-funding sites). As far as I could tell, the site has almost only projects (companies?) developing health care IT products, seeking small amounts (under $10K), and offering a nice “thank you,” not equity, as a return for “investors.” Medstartr states it provides its users “events, mentors, experts, challenges, partners, packaging, promotion, and optimization services to create a model that maximizes the chances of success for ideas in healthcare” and claims to have raised $250K “online” (less Medstartr’s 5-8% take) and $8 million “offline,” whatever that means.

So it looks to me that for now that crowd-funding offers only small amounts of short-term funding to global-health start-ups, but, when the SEC rules are final and if a investment portal can wrangle angel investors with a philanthropic streak, equity-based crowd-funding may be possible. But then again, I may be wrong. Last month I noted that an organization called the Immunity Project started a donation-type crowd-funding campaign to raise $1 million to advance a vaccine for HIV. Since its founding in 2010, the California-based Project, which describes itself as a “non-profit initiative” (I guess the founders thought “company” has a negative connotation), has identified HIV epitopes used by the rare humans able to control HIV infection (FierceVaccines article), got a $1 million grant from Microsoft, and conducted animal studies (sparse details are at Immunity Project). The Project director, Reid Rubsamen who is also CEO of a medical device company, told the San Francisco Business Times that the goal is to complete the funding this coming summer and have an inhaleable candidate vaccine to test in humans in 2015, while continuing to raise the $25 million he estimates is needed to complete testing and registration (SFBT article). As for manufacturing and distribution, he was quoted: “You pretty much need to be thinking about free distribution because the commercial reality is it’s a multibillion-dollar industry. For HIV, the Mount Everest is if we see some really good results, we can rally people around this to do large-scale manufacturing and distribution.” So crowd-funded manufacturing and distribution, too?

I wish him well, but I’m not sure if $25 million more will be enough. HIV is a challenging vaccine target (see a HealthLine article) and the trials expensive. I saw one estimate of the costs of a Phase III trial as $70 million (another FierceVaccines article). I respectfully suggest the Project’s management raise whatever money is needed to generate proof-of-concept data, develop a rationale for why the Project’s vaccine will succeed where others have failed, and use old-fashioned person-to-person salesmanship to find a corporate partner with the expertise and money to test, register, and sell an affordable vaccine. Crowd-funding may be one way to generate seed money but it may also divert and dilute the founders’ efforts to find people and resources needed for the long-term.

[Update: The Immunity Project team is now posting the results of its in vivo preclinical work at Immunity Project blog which is a great idea and will allow researchers familiar with the science (not me) to offer critiques and improvements.]

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